3 Important RRIF Strategies

If you recall, registered accounts are fully taxed in the year of death if not left to a spouse or qualified beneficiary. Essentially, if you intend to leave your RRSP, RRIF, LIRA, etc., to a child, the full value of these accounts is included in your income. For example, if you have $1,000,000 in registered accounts, this entire amount is added to your income in the year of your passing. On average, the tax rate in the highest bracket across Canada is 50%. This means $500,000 would go to the CRA, leaving $500,000 for your children.

If this concerns you, consider three strategies that can help reduce the value of the registered accounts and protect them.

1. Spend It

By spending more of your RRIF money than required for income needs, you will deplete the RRIF account faster, thereby lowering both the value of your RRIF at death and the estate taxes payable.

However, by prepaying taxes on the withdrawals, you will also reduce the amount of tax-sheltered, compounded assets, and may experience an OAS clawback.

Many people ask about the optimal amount to withdraw from their RRIF annually. There is no one-size-fits-all answer. To avoid an OAS clawback, it's crucial to keep your income below the clawback threshold. It’s also important to review the tax brackets in your province. If the taxes you pay now approach the amount that would be owed as estate taxes, there may be little to no benefit.

2. RRIF Meltdown or Create Tax Deductions

If you can create a tax deduction, you can offset your RRSP or RRIF income. The most common way people in this demographic create a tax deduction is by borrowing to invest. By doing this, you can generate income in a non-registered account to cover the interest on the debt. You can then withdraw an equivalent amount from your RRIF, effectively melting down the RRSP or RRIF tax-free.

3. Insured RRIF

Sometimes, spending the income and prepaying tax isn't the best option, and many people reaching RRIF age may not be comfortable borrowing to invest. A better choice might be to let your RRIF continue growing tax-deferred and allow your OAS income to be received. However, this leaves the estate tax to be paid upon your passing, or that of your spouse.

Remember, when you pass away, your RRSP or RRIF can roll over to a spouse, common-law partner, or qualified beneficiary tax-free. However, if left to any other beneficiary, the RRSP or RRIF is considered "sold," and taxes are payable at your marginal tax rate. For example, if your RRIF is worth $1,000,000 at the time of death, approximately $500,000 in taxes would be payable to CRA, leaving the remaining $500,000 for your beneficiaries.

Insuring your RRIF won’t eliminate the taxes due, but the insurance can cover the CRA bill, ensuring your beneficiaries receive the full amount of your estate.

It’s essential to conduct a detailed review of the options and considerations involved.

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