How to choose a beneficiary for your RRSP or RRIF

One factor drives many decisions behind naming a beneficiary for a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF). When an individual passes away, remaining assets in the RRSP or RRIF are taxed as income at the marginal tax rate on the final return – unless the individual has named a “qualified beneficiary.” A qualified beneficiary is the spouse (or common-law partner), a financially dependent child or grandchild under age 18, or a financially dependent child or grandchild of any age with a physical or mental disability.

Naming your spouse

By naming your spouse as beneficiary of your RRSP, assets will roll over to the spouse’s RRSP and continue to grow on a tax-deferred basis. Your estate doesn’t face the tax bill.

Note that when you convert an RRSP to a RRIF, the beneficiary designation doesn’t carry over. If you still want to designate your spouse, you can name him or her as beneficiary or successor annuitant of the RRIF. As successor annuitant, the spouse takes over the existing RRIF, with investments and payments remaining the same. It’s an easy transfer.

Naming your spouse as beneficiary of your RRIF is more cumbersome. The existing RRIF collapses, investments are sold, and funds roll over tax-deferred to the spouse’s RRSP or RRIF, all of which involve paperwork. Also, there’s the investment risk of selling securities whose value has fallen at the time of the transfer. But the beneficiary designation provides more flexibility. For example, it may be desirable tax-wise to leave some RRIF assets in the estate, with the balance rolling into the spouse’s RRIF or RRSP.

The charity advantage

Designating a charity as the beneficiary of your RRSP or RRIF assets provides a significant tax benefit. The RRSP or RRIF assets are included as taxable income on your final tax return, but the estate receives a tax credit for the entire donation. Typically, the net result is that the estate could pay no tax on the RRSP or RRIF proceeds.

Designating your estate or other beneficiaries

In estate planning, it’s important to keep in mind that when you name a non-dependent child, grandchild or other person as beneficiary of your RRSP or RRIF, the beneficiary receives assets tax-free. Your estate pays the tax, so you must account for that tax liability.

In some cases, an individual will name the estate as RRSP or RRIF beneficiary. The purpose could be to fund a trust, cover such tax liabilities as capital gains tax on vacation property, or meet specific directions in the will. Note that designating the estate as beneficiary exposes RRSP or RRIF assets to the estate’s probate fees – with all other designations, these assets pass outside of the estate.

Talk to us if you wish to discuss your choice of beneficiary, whether it’s for your RRSP, RRIF or any financial vehicle.