Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts
The following is a sponsored post by Sun Life Financial, all thoughts and opinions are my own.
It has been said there are two certainties in life – death and taxes. At least you can do something about the latter to help your spouse, your partner, your family and/or your estate. This post will tell you how when it comes to general guidance associated with naming beneficiaries for key investment accounts.
Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts – don’t forget the fine print!
My wife and I have been diligent to save and invest in a few investment accounts over the years. First and foremost, we strive to max out contributions to our TFSA (Tax-Free Savings Accounts) every year – investing in Canadian dividend paying stocks – although there are many other great things you can do with your TFSA. We accomplished this goal again this year.
I’ve also worked hard to max out contributions to my RRSP (Registered Retirement Savings Plan) over the years, and my wife is closing in on maxing out her RRSP as well.
Maxing out our TFSAs and (eventually) both RRSPs will be a heady one-two early retirement investing punch. Yet buried in the paperwork we filled out many moons ago when we opened these accounts was some very important wording about naming beneficiaries for these accounts. Get those decisions right, and estate planning can be much easier. Mess that up, and it could be a tax nightmare for your loved ones.
Let’s take a closer look at some common considerations to naming beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts.
Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts overview
Today’s post will look at all of these accounts to see what might be best for you! Let’s start with the RRSP, since for many Canadians, RRSP assets might be the largest tax liability we own.
The main thing you need to know is, generally speaking, upon death the taxman treats the fair market value of your RRSP as income – subject to tax at your marginal tax rate. Current CRA (Canada Revenue Agency) tax rules require that fair market value of the RRSP, as of the date of death, be included in the deceased’s final tax file submission.
Tax bills on the RRSP can be avoided, however, if you name certain beneficiaries. To make things more complicated (CRA tends to do that…), not all beneficiaries are created equal. Here are some things to think about, since qualified beneficiaries may be able to receive RRSP funds without anyone paying tax upon your death.
RRSP qualified beneficiaries
- A spouse or common-law partner
There is a spouse rollover provision that allows a spouse, who if listed as the beneficiary, gets to put the deceased’s RRSP assets into their own RRSP without any immediate tax consequences. For what it’s worth, this is what my wife and I have established for our RRSPs. This way, either one of us can use this rolled over money and maintain tax-deferred growth inside an RRSP account until monies are ultimately withdrawn.
I suppose a spouse or common-law partner can also choose to take the RRSP assets as cash but in that scenario, RRSP proceeds are taxed in either the hands of the surviving spouse in the year of death OR the estate of the deceased will account for the value of the RRSP in the final income tax filing and will need to pay any resulting taxes.
- A financially dependent child or grandchild
Canadians may wish to consider another option. An RRSP owner can designate their financially dependent child or grandchild as their RRSP beneficiary. From there, depending upon the child’s age and nature of the dependency, a host of other options can potentially occur, including:
- Transfer the money to their RRSP (or even a RRIF – Registered Retirement Income Fund).
- Purchase an annuity until age 18 – while no tax is payable immediately at time of death, annuity payments are 100% taxable to the child.
- Rollover assets into a Registered Disability Savings Plan (RDSP).
Other RRSP beneficiary options?
You can always consider naming a charity as an RRSP beneficiary. The RRSP account holder can send some or all of their RRSP assets to charities after death. If that choice is made, the value of the RRSP assets is included in the final income of the deceased and taxes apply. The benefit (pardon the pun) of this approach is the charitable donation will quality for a donation tax credit up to 100% of the RRSP assets donated – pretty much negating any taxes due.
Consider naming a beneficiary other than adult children. Why? If no proper beneficiary is named (i.e., you have no spouse and only have non-dependent adult children to name) OR if the estate is listed as the beneficiary, then the RRSP assets will simply be added to the estate or given to non-dependent adult children beneficiaries, included in the deceased’s income as a deemed disposition of the deceased – and the estate will be responsible for paying the taxes owing. While simple, letting RRSP assets go to the estate increases the value of the estate and more probate or administration fees will apply to settle it. Adult children should be aware of this and so should the RRSP owner!
Bottom line is that RRSP assets can be transferred directly to the beneficiaries you designate (in the RRSP account documentation) when completing the application. Whatever option investors choose ensure that choice is directly aligned to wills or an overall estate plan.
(Note: In Quebec, it is generally not possible to name beneficiaries on RRSP or RRIF applications. This means RRSP and RRIF assets generally flow through to the estate.)
As you probably know based on the titles of these plans, RRSPs and RRIFs are similar in that you can keep assets inside these accounts for tax-deferred growth. The major thing to be mindful of is that RRSPs must be collapsed by the end of the year you turn age 71. You don’t have to turn your RRSP into a RRIF in your early 70s: you can convert it to an annuity as another option, or you can do both; it does not have to be a RRIF-or-annuity decision.
You know from the RRSP beneficiary options above that having RRSP assets tied up with the estate can be costly. This is why many advisors suggest investors consider treating your beneficiaries for RRIFs like beneficiaries for RRSPs. Upon death, your RRIF will be collapsed and the investments sold. As the beneficiary, the surviving spouse can have the money from your RRIF rolled over to their RRSP or RRIF.
A difference between RRIFs and RRSPs is that for a RRIF, a spouse or common-law partner can be named as a “successor annuitant”. In that fine print, following the death of the RRIF holder, the account stays open and the spouse becomes the new owner and will continue to receive the RRIF payments.
When we establish our RRIFs this is what my wife and I intend to do: name each other as a “successor annuitant”. In doing so, there will no need for my wife (or I) to collapse the RRIF, no paperwork to deal with, and in the case of my wife she will simply take over RRIF payments from me.
If for whatever reason your spouse is not a “successor annuitant” but the RRIF beneficiary, the RRIF will be collapsed in the name of the deceased; investments are sold. Then as the beneficiary the surviving spouse or common-law partner can have monies rolled over to their RRSP or RRIF.
What if you don’t name a RRIF beneficiary?
You’ve seen this drill before: your RRIF will be included in the calculation of probate fees on your estate. The value of your RRIF will also be included as income on your final tax return. That means the beneficiaries of your estate may get less money, after all income taxes and probate fees are paid.
Other RRIF beneficiary options?
Like the RRSP selection, if you name a charity as the beneficiary of your RRIF then your estate may receive a charitable donation tax credit up to 100% of the RRIF income report on the deceased’s final income tax return. This can help offset any tax owning on the proceeds delivered by the RRIF. It can also be a great option if seniors don’t have a spouse, their adult children are well-established, and folks want to send money to their favorite charity that would have otherwise gone back to government pockets.
Are there any tax implications to naming adult children as RRIF beneficiaries?
Yes there are! If a RRIF beneficiary is not a spouse or common-law partner – or a financially dependent child or grandchild – then the entire value of the RRIF will be subject to tax.
Just be mindful that without a RRIF beneficiary, probate costs might be higher since someone has to manage your estate and in addition to that, court fees are typically based on a percentage of the value of your RRIF.
This account is stellar, I mean, tax-free growth and income from this account in retirement?! Almost seems like it’s too good to be true!
Basically, you can choose whoever you want as your TFSA beneficiary and in our case, I named my wife. As a TFSA account holder, though, I actually named my wife a “successor holder” not a “beneficiary” – there is a difference.
TFSA success holder
This designation can only be used for a spouse or common-law partner. Similar to the RRIF “successor annuitant”, this holder of a TFSA simply takes over the account and becomes the new owner as the name suggests. Here are the benefits of this approach.
As a TFSA successor holder:
- the deceased’s TFSA value is not included in their date of death/final income tax return;
- the successor holder will become the new holder of the TFSA immediately upon the deceased’s death;
- the successor holder will receive your TFSA assets, i.e. all earned income/assets up to the date of death sheltered within a TFSA account;
- all of the earned income after the date of death will remain sheltered within the TFSA (a HUGE benefit);
- after taking over ownership of the deceased’s TFSA, the successor holder can transfer all or a portion of the deceased’s TFSA account into their own existing TFSA account without impacting their TFSA contribution room; and
- after taking over ownership of the deceased’s TFSA, the successor holder can make tax-free withdrawals and make new contributions subject to their own unused TFSA contribution room limits.
If someone other than a spouse or common-law partner is to inherit your TFSA, that person would typically be referred to as “beneficiary.” What you need to know in this case is: the account must be collapsed, and the value at time of death will go to the named beneficiary. This is how it plays out.
As a TFSA beneficiary:
- the beneficiary will receive the fair market value of the deceased’s TFSA account free of any income taxes;
- all of the income earned and increase in the TFSA assets values between the date of death and the date of the transfer to the beneficiary is taxable income and must be included in the beneficiary’s income tax return (a major drawback for spouses and common-law partners compared to the option above);
- beneficiaries can contribute a portion or all of the deceased’s TFSA assets up to the limit of their own unused TFSA contribution room; and
- if no beneficiary or successor holder is designated in the TFSA documents or in the deceased’s will, the TFSA assets will be paid to the deceased’s estate and disposed of in accordance with their will.
Now, your spouse or common-law partner can also be a beneficiary but this has some draw backs to “successor holder”. As a TFSA beneficiary they can transfer the value of your plan on the date of your death (before December 31 in the year of your death) without requiring contribution room but there is paperwork involved. In dealing with the aftermath of your death, your survivor must designate this “exempt contribution” on a CRA RC240 form (Designation of an Exempt Contribution Tax-Free Savings Account (TFSA)), and file the form with the CRA within 30 days of the contribution. For the survivor to obtain an exempt contribution, the amount must be received and contributed to their TFSA during the rollover period. Exempt contributions cannot exceed fair market value of the deceased’s TFSA. So, amounts earned in your TFSA after death, but before distribution to your survivor, would require TFSA contribution room for future tax sheltering – basically it’s very complicated with CRA. Best to do any transfer as quickly as possible to reduce taxation.
What if you don’t name a TFSA beneficiary?
If no beneficiary is named or you name your estate as the TFSA beneficiary, then proceeds from your TFSA will be added to your estate and this will possibly increase probate fees.
For our situation, I think we made the right choice for TFSA “successor holder” status. While naming my spouse as a TFSA beneficiary would be fine I guess, I don’t want her to go through any more hassles than necessary after I am gone.
Non-registered account beneficiaries
Simply put, when you die with assets in a non-registered account, there is a deemed disposition of all your assets at their fair market value. Essentially, your investments are cashed out in the eyes of the CRA – whether they’ve been sold or not – and applicable taxes are determined.
Cash in savings accounts and guaranteed investment certificates (GICs) are taxable, related to the interest earnings accrued for the year – and that can flow through to the estate and then to beneficiaries.
Stocks, like the Canadian dividend paying stocks that I own, may be subject to capital gains. The good news is, these stocks receive more favourable tax treatment than those assets earning just interest. You can read more about the Canadian dividend tax credit from my site here.
If my taxable assets drop considerably in value, I could also have a capital loss as well; such losses could at the time of my death offset taxes owing on capital gains inside this account. To the best of my knowledge, savings accounts, GIC’s, and Canada Savings Bonds do not permit beneficiary designations. At the time of my death, all my non-registered stock proceeds will go into the estate and terms and conditions of my will shall play out. (My will already states what to do with my investments and assets that I don’t jointly share with my wife.)
Annuities and Life Insurance Policies
You can absolutely name a spouse, a child or other individuals as beneficiaries under these types of contracts. All proceeds are paid tax-free to the beneficiary and, in addition, there are no probate fees charged to these assets.
All insurance products permit beneficiary designations. Sun Life also has accumulation annuities (or insurance GICs) and there are also segregated fund contracts as an alternative to mutual funds. I believe all investors are best advised to understand the products they are investing in before they buy them – do you own due diligence.
Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts summary
Needless to say there is a lot to consider when it comes to naming beneficiaries for TFSAs, RRSPs, RRIFs in particular. I’m really just scratching the surface here since I did not tackle all accounts or possibilities, let alone some provincial nuances (i.e., rules in Quebec). I do hope though this post offered some perspectives and guidance to consider for your situation.
Portfolio draw down orders to optimize for beneficiaries – TFSAs, RRSPs, RRIFs and other key accounts summary
I think when it comes to our personal portfolio draw down options and estate planning preferences, we are very likely to proceed with the following draw down order(s) to avoid huge taxation issues/liabilities with our RRSPs/RRIFs in particular:
1. Non-registered (N), RRSPs (R), TFSAs (T) (NRT)
This sequence might work well if you have built up a modest taxable account value by your 50s or 60s and you might have higher income needs and wants in retirement. To fight longevity risk, you can exhaust your non-registered account first, allowing tax-deferred money (RRSP) and tax-free investments (TFSA) to grow and compound away. “NRT” might work well to fight longevity risk, may apply to those retirees with any workplace pensions to draw from, and help those investors who wish to defer Canada Pension Plan (CPP) and/or Old Age Security (OAS) benefits until a maximum age.
More reading: When to take your CPP benefit
2. Non-registered (N), TFSAs (T), RRSPs (R) (NTR)
Also in this sequence, you can consider tapping your taxable account first but reverse the order between TFSAs and RRSPs – keeping RRSP assets “until the end”. The benefit of this approach is you have some long-term income splitting opportunities, while money continues to compound tax-deferred. (If you are the recipient of a pension and are 65 or older, you may split income from your RRSP, RRIF, life annuity, and other qualifying payments.) The challenge however for some retirees is by keeping RRSP/RRIF assets preserved well into their 70s and 80s, these seniors could be subject to OAS clawbacks depending on their income level. Recall OAS is an inflation-protected government benefit that few retirees want clawed back! More on that in bit!
Of course beyond these sequential orders there can be a myriad of drawdown tactics that can be used to balance short-term and long-term tax efficiency needs, optimize retirement income, let alone fulfill any wealth transfer desires:
- RRSPs (R), Non-registered (N), then TFSAs (RNT) – usually done to minimize taxation and to minimize OAS clawbacks given very healthy portfolio values.
- Blended withdrawals – some blends of NRT, NTR, or RNT.
- Custom withdrawals – based on tax bracket management in the “go-go” retirement years vs. “slow-go” years which includes some strategic RRSP withdrawals when minimal other income streams are in play.
- And more and more….
My portfolio drawdown order?
I’ll probably adjust my order over time but I wrote about my potential portfolio drawdown order here.
Some of the key advantages of my drawdown order is it will put less stress on my personal assets when I am older, it will provide built-in inflation-fighting power, and it will also be very tax-efficient.
I want to thank my partner, Sun Life Financial, for assisting with this post so that you can dive deeper and make some sound, educated choices when it comes to naming beneficiaries for your TFSAs, RRSPs, RRIFs and other key accounts. You can learn more and plan more by checking out their resource page here.
My Own Advisor is not a tax professional and this information is not tax advice, however, I do my best to ensure information on my site is accurate and relevant as much as I can. Thanks for being a fan.
Footnotes to this post: