Your RRSP: why you must select the right beneficiary

Benjamin Franklin once wrote, “In this world nothing can be said to be certain, except death and taxes.” While you can avoid neither, there are ways to reduce the amount of tax owed upon your death so that more of your money goes to your loved ones.

One of the most basic strategies is to select a qualified beneficiary for your registered retirement savings plans (RRSPs).

When you open a new RRSP account, you’re asked to name a beneficiary who will receive the account’s proceeds when you die. If you’re like many Canadians who opened an RRSP in their youth, you selected a parent, a sibling or even your partner at the time – but is your beneficiary a qualified beneficiary?

A qualified beneficiary can receive the full value of your RRSP upon your death, without incurring any taxes. If your beneficiary is not a qualified beneficiary, then the full value of your RRSP is taxable as earned income on your final tax return; if the account is large, this tax hit could eat up almost half of the RRSP’s value.

There are 3 types of qualified beneficiaries:

  1. a spouse or common-law spouse
  2. a child or grandchild who is financially dependent on you due to a physical or mental infirmity
  3. a financially dependent child or grandchild who is under 18.

The first 2 types can roll your RRSP assets into their own RRSP, or into their registered retirement income fund (RRIF) or a life annuity. The third type – the financially dependent child or grandchild who is a minor – can only purchase a term-certain annuity (TCA) which must mature by the time he or she turns 18. Your assets are received without a tax hit when you die, but subsequent annuity payments are considered income for your beneficiary.

It’s a good idea to review your beneficiary selections for all your RRSP accounts, especially after materially significant life events like marriage and divorce. The wrong beneficiary designation could lead to a big tax bill you can easily prevent.

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2 Responses to Your RRSP: why you must select the right beneficiary

  1. Jean Lavigne says:

    I have an adult special needs dependant. Does the recipient require RRSP contribution room. She has never worked and has not accumulated any room. Thanks.

  2. Typically, any person or entity can be named as a beneficiary of a trust, will or life insurance policy and the one distributing the funds (the benefactor) can put various stipulations on the disbursement of funds (e.g. the beneficiary must have attained a certain age or be married). There can also be tax consequences to the beneficiary. For example, while the principal of most life insurance policies is not taxed, the accrued interest might be.