RIFF’s, Death, and TAX

Recently, a couple in their mid-80s came to me for help with their taxes.
They have:

• Over $500,000 in a Registered Retirement Income Fund (RRIF)

• A paid-off home

• Pensions that give them more than enough income to live comfortably

Their big goal is to leave as much money as possible to their three children.

Here’s the problem:

• When one spouse dies, the RRIF can pass to the other spouse with no tax right away.

• But when the second spouse dies, the RRIF is treated as income and can be taxed at up to 53.5% in Ontario.

At age 85, the government requires them to withdraw at least 8.51% of their RRIF each year. That’s about $42,550. If they both pass away before age 92, there could still be hundreds of thousands of dollars left, and more than half of it could go to taxes instead of their children.

For example, if they both passed away at age 89, there could be around $300,000 left in the RRIF and a tax bill of about $160,500.

The Fix

Instead of only taking the minimum, they can withdraw more now in a smart way. This may mean paying a bit more tax each year, but it can reduce the total tax bill over their lifetime, and leave more money for their kids.

This is something that should be caught during the financial planning process. The sooner you plan, the more options you have.

The KEY takeaways:

1. Understand the tax consequences of your accounts at death

2. Think lifetime tax bill versus annual tax bill

3. Understand your income versus expenses and what potentially could be left over.