What Happens to your RRIF when you die?

Wow. This is a pretty dark subject. It is dark in more ways than one. It is dark because we have to talk about death and it is dark because we have to talk about paying the CRA.

We spend our whole lives working 40-50 hours per week being told that if we put enough money away we can work less as we get older and maybe even quit working to enjoy some of the pleasures we weren’t able to enjoy while we were working. If you put some money away with each paycheck you can build up a nice nest-egg to use while you are in this stage of life.

Sounds great doesn’t it?

One of the ways we are told to save for later years is through a savings vehicle known as a registered retirement savings plan, or RRSP. When you make a contribution to a plan like this you get a tax refund, or so they say. What many advisors don’t mention is that once it is in the RRSP it becomes controlled by all of the government rules and regulations. At a certain age they force you to start taking money out, and tax you on the money. Now, don’t get me wrong here. They gave you your tax money back when you contributed it and want it back when you take it out.

Here is the dark part, and questions you need to ask about it:

What if you don’t need the money when the government tells you to start withdrawing? Sorry. You have to draw the money out.

What if you are in a high tax bracket when you have to draw the money out? You have to draw it out no matter what, so you will probably be paying more in taxes than you saved all those years ago when you initially contributed to the plan.

What if I grow the plan to $300 000 in value and then die? The CRA still wants its money, and when you have a plan like this and die, the CRA says you cashed in the whole plan a minute before you died so you will have to add the whole amount to your estate tax return. You would probably end up paying just over $100 000 in taxes upon death, leaving your family with around $200 000. Not bad.

What if you considered Plan A?

What if you don’t need the money when the government tells you to start withdrawing? Then don’t. There are no rules or regulations for withdrawing the money. Take it, don’t take it. It’s up to you. Not the government.

What if you are in a high tax bracket when you have to draw the money out? The key word here is ‘have to’. Since there are no government rules or regulations tied to Plan A you never ‘have to’ take out the money.

What if I grow the plan to $300 000 in value and then die? The government gets none of it. In fact, Plan A will pay out just over $565 000 to your family. No tax implications, no estate issues, no accounting fees, no lawyer fees, no probate fees. Just a cheque to whomever you decided the money should go to.

So, which way should you go? The quick and easy answer is ‘it depends’. There is no one-size-fits-all answer, which is why a 32 minute coffee meeting to learn a bit more about your situation is the way to start.