What happens to your RRSP after your death?

Talking about death is never easy. But sooner or later we all have to come to terms of this harsh reality of life. During your lifetime you might have accumulated a lot of wealth, but thinking about what will happen to the wealth upon my death is always a concerning question. It is best that you make decisions about your wealth and possessions while you are alive so that your family doesn’t have to go through any hassle.

RRSP – Registered Retirement Savings Plan is widely recognized as a valuable and highly favored method of saving for retirement. The main advantages of this plan are – tax-deductible contributions and tax-sheltered growth. RRSP also offer the benefit of tax deferral during the account holder’s lifetime.

If you are a Canadian citizen and have invested in RRSP and want to build an effective financial plan, let’s start by understanding the basics of what happens to your RRSP upon your death.

• A crucial aspect of estate planning involves designating a beneficiary for your RRSP. This ensures clarity regarding the distribution of your assets and funds upon your passing.
• Opting to roll your RRSP into a qualifying survivor's RRSP or RRIF comes with a tax advantage. In this scenario, you won't incur any tax liability on the transferred amount in your final tax return. Instead, the qualifying survivor assumes the tax responsibility when they withdraw the funds.
• Failing to designate a beneficiary for your RRSP or RRIF can have significant tax implications. In the absence of a designated beneficiary, the funds in your RRSP or RRIF will be withdrawn, and you will be liable to pay taxes on the withdrawn amount. Proper beneficiary designation is essential to ensure a smooth and tax-efficient transfer of your RRSP assets.

Do I have to pay tax on my RRSP after death?

Tax deductions offered by RRSP are not permanent. While your funds remain within the RRSP, you can enjoy the benefits of tax deferral. However, at the time of withdrawals or when you begin accessing the funds upon retirement, taxes on RRSP become applicable. The same taxation principle applies when an RRSP is closed after the account holder’s death. It is important to be mindful of the tax implications at various stages of your RRSP journey, including during retirement and estate planning.

Who will get my RRSP after my death?

You hold the authority to designate a beneficiary for your RRSP and outline the inheritors in your will. You have the freedom to distribute the funds among multiple beneficiaries according to your preferences.

Transferring an RRSP can be done in two ways –

1. To a qualifying survivor who is 71 years old or younger, including –

• Spouse or common-law partner
• Financially dependent children or grandchildren

2. To a non-qualified survivor, such as –

• Your estate
• Any Charity
• Non-related individual
• Financially independent children or grandchildren

The tax consequences will differ based on your choice of qualified versus non-qualified survivor. If the beneficiary is your spouse, they have two options –

• The money can be transferred into an RRSP
• It can go to their life insurance company, which must use it towards an eligible financial product within about a year after the spouse's death

Non-qualified beneficiaries will receive the money from your RRSP only after the CRA has taxed it. Once received, they have the freedom to use the funds for anything, with no obligation to keep it in an RRSP.

Details about RRSP rollover

RRSP rollover refers to the transfer of funds from one Registered Retirement Savings Plan (RRSP) to another without incurring any tax consequences. This transfer is typically done when an individual changes financial institutions or investment products while maintaining the tax-deferred status of their retirement savings. There are two common types of RRSP rollovers –

1. Direct RRSP Rollover: This occurs when you transfer your RRSP funds directly from one financial institution to another. The funds are never disbursed to you personally, ensuring that you don't face any tax implications during the transfer.
2. Indirect RRSP Rollover: In this scenario, you withdraw the funds from one RRSP and then reinvest them in another RRSP within a specified time frame (usually 60 days). To avoid immediate taxation, you must deposit the full withdrawal amount into the new RRSP account.

It is essential to follow the guidelines and timelines provided by the Canada Revenue Agency (CRA) to ensure that your RRSP rollover remains tax-free and compliant with the tax laws.

How to rollover an RRSP after death?

To initiate the RRSP rollover process after the account holder’s death, you will need to fill out the beneficiary designation form provided by your bank. This form served as an authorization for the bank to transfer the funds from the deceased’s RRSP into the qualified survivor’s RRSP or RRIF (Registered Retirement Income Fund).

Am I eligible for RRSP rollover?

In Quebec, an RRSP is considered a family asset and, in the event of death, is treated as a household asset for married or civil-union spouses. The concept of a rollover is to enable financially independent individuals within the same household to retain the advantages of the RRSP after the account holder's passing. Additionally, children or grandchildren who were financially dependent on the deceased or a person living with a disability and relying on financial support may also benefit from this arrangement.

However, it's important to note that rules governing the division of family assets may differ in other provinces across Canada, and regulations can vary from one province to another. Understanding the specific rules in your respective province is crucial when considering the implications of an RRSP in estate planning and asset distribution. Seeking professional advice can be beneficial to ensure proper compliance and optimize the benefits of an RRSP rollover in your particular situation.

Should I consider my spouse for RRSP rollover?

In many instances, opting for a spousal rollover or transferring to another eligible beneficiary is highly recommended. This approach allows you to avoid potentially high tax rates. However, there are situations where a spousal rollover may not be the best course of action, and transferring only a portion of the RRSP may suffice.

For instance, some individuals may prefer to directly pass on the RRSP funds to their children as an inheritance rather than their spouse, especially if the spouse has children from a previous relationship. In such cases, the decision rests with the individual, even though the tax implications may reduce the overall inheritance amount.

The deceased's income can also play a role, particularly if the death occurs early in the year when tax returns are filed. In such cases, the surviving spouse may choose to withdraw only a portion of the RRSP, which will be taxed on behalf of the deceased, and then transfer the remainder accordingly. The specific circumstances and preferences of the parties involved play a significant role in determining the most suitable approach for RRSP transfer after death.