Gifting your RRIF to your children

Q: Can I change my RRIF back to RRSPs or put it all in a savings account? Bottom line is I want to gift the money to my children while I’m still alive and can see them use it.

I live in Alberta and have $220,000.

—Angie

A: Gifts to children and inheritance planning are very personalized choices. Some people, like you, Angie, like to see their children benefit earlier rather than later. Others prefer to keep control of their assets until their death.

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There are pros and cons to both approaches. There’s no doubt it could be nice to see your children benefit from an inheritance while you’re still alive. And most inheritors could use the money sooner rather than later. But there can be tax benefits or consequences from passing along money early. And you must be careful about giving away too much money too early given it’s hard to know how long you are going to live and how expensive long-term care costs can be in your later years.

Once an Registered Retirement Savings Plan (RRSP) has been converted to a Registered Retirement Income Fund (RRIF), it cannot be converted back into an RRSP after the age of 71. In theory, a RRIF could be transferred back to an RRSP if you were under the age of 71, but it probably wouldn’t be necessary unless you opened a RRIF early and then decided you wanted to stop the minimum required withdrawals, Angie.

Your suggestion to “put it all in a savings account” would constitute a RRIF withdrawal and the full withdrawal – $220,000 if you transferred your whole account – would be taxable on your tax return.

RRIF withdrawals are taxable as taken with minimum required withdrawals each year based on your age. You can take more than the minimum, up to the full account balance, if your RRIF is not locked-in and didn’t come from a pension plan transfer. Locked-in accounts have maximum annual withdrawals.

The tax system in Canada is a progressive one, with tax rates increasing as income increases. At income in excess of your $220,000 RRIF balance, tax is payable at anywhere from 44.5% in Nunavat to 54% in Nova Scotia. The marginal rate on the next dollar of income exceeding $220,000 is taxable at 47% in Alberta.

On this basis, a full withdrawal of your RRIF may not make sense, Angie. But at the same time, it highlights what happens on your death, when your RRIF becomes fully taxable anyway. If you have an eligible spouse, whether you are legally married or common-law, your RRIF can transfer on a tax-deferred basis into a RRIF in their name. But if your RRIF is payable to other beneficiaries, or to your estate before being divided, the full balance is taxable on your final tax return.

So, if you felt your life expectancy was not going to be a long one for whatever reason, Angie, an accelerated withdrawal of your RRIF may not be that much different from taking the minimum withdrawals and having the full balance taxable on your death.

Let’s imagine you are 80 and your RRIF earns 4% annually for the next 5 years and you die at age 85. If you take your minimum withdrawals over the next 5 years at the end of each year, your RRIF balance would still be a whopping $184,914 upon your death.

The difference between $220,000 of taxable income today and $184,914 in 5 years may not be significant. The total tax payable on your $184,914 RRIF would likely be at least 30% and likely much more than that depending on your other sources of income in your year of death.

But what if you split the $220,000 over 5 years, withdrawing about $44,000 each year? You may pay as little as 20% tax on these annual withdrawals, depending on your other sources of income and eligible tax credits.

It may therefore be worth considering an accelerated drawdown of your RRIF and ongoing gifts to your children as opposed to doing it all in one fell swoop.

Another option, if you have a house, is to consider borrowing on a line of credit. This idea comes with a BIG asterisk, Angie, because you should be careful at any age or stage taking on debt. But in retirement, it’s that much riskier. My logic is that if you want to give $100,000 to your kids and if you have a large pension, let’s say, it may take a withdrawal of almost $200,000 from your RRIF to have $100,000 after-tax. A line of credit may be a cheaper way to access funds, costing you only $4,000 of annual interest instead of $100,000 of tax.

This strategy could work well if you have good cash flow, you’re expecting to sell your home anyway, you’re in a moderate to high tax bracket and you don’t have any reservations about a strategic use of debt.

The point is, Angie, there are always different ways to arrive at the same goal. Borrowing in retirement may not be appropriate for A LOT of retirees. But cashing in your entire RRIF might not be either.

First and foremost, make sure you have more than enough financial resources to take care of yourself for the rest of your life. And if you do, consider advice from professionals about how and when to pass along money to your kids. You may not choose the best option financially, because sometimes non-financial motivations – like helping your kids at your own expense – may be more important. This is the very personal nature of money and financial decisions.

Ask a Planner: Leave your question for Jason Heath »

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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