As hard as it is for me to believe, once upon a time, I was 18 years old. In the house I grew up in, when you turned 18, it was a big deal, and we had a ritual that my dad insisted we follow.
We had to open an RRSP.
Yes, you’ve read that right – our right of passage into adulthood was to open a Registered Retirement Savings Plan. My dad insisted that my sister and I were only adults if we became chronic savers. In retrospect, it was pretty solid adulting advice, and it was one of the reasons I became a chronic saver later in life.
Opening an RRSP is a right of passage in Canada. And maxing it out? Well, that feels like having the biggest banana split, with extra whipped cream and cherries on top. (Not that I actually bought that banana split, mind you, since I had been busy stuffing my retirement fund instead!)
Over the years, I nourished my monetary baby, and watched its balance grow and grow. Years of coddling, and playing with it, waiting for that big growth spurt to hit. Time flew by, and now, here we are, with it all grown up. . It has gone from baby savings, to a fully-funded adult RRSP, and someday will become a RRIF.
So, if you’re like me, and your RRSP is all grown up, what should you do now?
Helping your money move out of the house.
First and foremost: don’t be afraid to use your RRSP or RRIF to fund your retirement. That’s the purpose of saving registered funds. That said, some chronic savers reach a point where they realize that they won’t need all of their RRSP or RRIF to fund their retirement. Having excess savings can cause tax problems both in your lifetime, but also for your estate. It can, however, also open up some interesting opportunities to support our favourite charities.
For most of us, our registered account is going to be one of the most taxable assets we own. 100% of each dollar from our RRSP or RRIF goes into our income. Since we are required to take money out each year after converting our RRSP to a RRIF, that also means we might be forced to pay a lot more tax than we want.
For most Canadians, the tax savings we’ll get by donating from money from our annual RRIF proceeds will almost exactly match the tax owing on the RRIF withdrawal. So, you can think of your RRIF having $1 go to charity for each $1 you withdrawal and donate. (If you kept the money for your self, you could see as little as $0.465 cents here in my home province of Ontario.)
The only thing to keep in mind is that even if you donate your RRIF proceeds, the income you take from the RRIF still counts towards your income – which can be important if you are collecting OAS. As of 2023, OAS recipients become subject to clawback when their income exceeds approximately $87,000 at a rate of 15 cents per dollar, until its fully gone around $142,000 of income.
If you get creative, there’s a few smart ways you can donate from your RRIF prior to “expiration”
• Donate in-kind some publicly-traded securities to the charity that have the same value as your RRIF payment. Then, buy back those securities with the proceeds of your RRIF. This will get you a double tax savings, as in-kind publicly traded securities gifts don’t require capital gains tax to be paid, and you still get the tax credit that matches the value of your RRIF.
• Use the proceeds to pay the premiums of a life insurance policy that you setup to be owned by the charity. The charity can receipt you for the premiums, and then will benefit from a large lump sum when you pass away.
Putting your RRSP or RRIF up for adoption when you’re gone.
If there’s money left over in your RRSP or RRIF when you pass away, consider leaving some or all of your account to charity. Designating a charity as a beneficiary of your RRSP or RRIF one of the easiest ways to make a gift in Canada.
As you might already know the tax on your RRIF can be staggeringly high – up to 53 or 54% in most provinces, if you are leaving it to family members other than your spouse or a disabled child. There’s much better news if you choose to name a charity as beneficiary: for most estates across Canada, the tax savings will usually come very close to offsetting all the taxes payable on the RRIF at death. Unlike a gift made in your will, there’s no cost to make changes now or in the future to your beneficiary list. You retain complete flexibility, as long as you still have the legal capacity to make changes to your estate.
One important thing to note: if you have a spouse, it might make sense to make the charity a “contingent beneficiary” rather than the “primary beneficiary”. Most of the time, it makes sense to roll our RRIF proceeds over to our spouse, if our spouse is still around longer than we are, as taxation on the RRIF can be deferred until both spouses have passed. A contingent beneficiary means that if your spouse has gone first, then the funds go to the charity.
Naming a charity as beneficiary is super easy in all provinces other than Quebec: all you need is the official legal name of the charity, and, ideally, their charitable registration number. Most financial institutions’ forms will allow you to list the charity and their registration number on the form, and then set whatever percentage you wish of your RRIF to go to that charity. You can even name multiple charities!
There are a couple of situations where you should not or cannot name a charity as the beneficiary of your registered accounts:
• Its best not use this method of donation for pension money, due to the way pension tax is handled at death.
• Quebec residents are not allowed to name a non-person as a beneficiary of their RRIF or RRSP accounts, and so donations should be done via their will instead. Talk to your notary or legal advisor instead.
Empowering your RRSP or RRIF to do some good.
Giving your RRSP or RRIF proceeds to a charity can be a quick, easy and smart way to give for many of us. Its easy to do, it can make a huge impact, and, in the case of an estate gift, can leave a terrific legacy for the charities that are important to you. Its also a smart tax move, as for most people, the tax savings will match or even possibly exceed the tax owing on the RRSP or RRIF.
If, like me, you’ve nurtured your RRSP or RRIF for many years, why not introduce a bit of tax-smart sharing into your registered plans?
Ryan