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RRIF Estate Transfer Strategy

When your RRSP/RRIF income is not needed.


For many Canadians, contributing to an RRSP is an effective way to build a retirement nest egg. The benefits are hard to pass up: tax-deductible contributions and tax-deferred growth. However, for a segment of the population, this may not be enough. As is the case with most high-net-worth individuals, their wealth usually outlives them. A good problem to have, I’m sure. Therefore, it begs the question of whether continuing to contribute and/or even maintain their RRSP/RRIF is the best way to maximize the value of their estate. In this article, I’ll explore the RRIF Estate Transfer strategy, which can be a viable alternative for those wishing to resolve this issue.

Before we dive into this strategy, let me recap the taxation of RRSPs/RRIFs both while alive and at death. During one’s lifetime, any amounts withdrawn, or payments received from RRSPs/RRIFs are considered fully taxable. Even if money is not needed for personal lifestyle goals, a legislative minimum withdrawal is mandated each year beginning at age 71 for the RRSP/RRIF holder. This legislative minimum is represented as a percentage of the RRIF balance each year and continues to rise as the client ages. At death, the RRSP/RRIF balance is taxable to the deceased and must be reported in their final tax return. A tax-deferred rollover is available if the balance is transferred by either beneficiary designation or through the estate to an RRSP/RRIF or eligible annuity of a spouse, common-law partner, or financially dependent child/grandchild. For a financially dependent child/grandchild, the value of the RRSP/RRIF can only be used to purchase a term certain annuity with a maximum term to age 18. This will trigger taxes annually based on the annuity payments in the hands of the dependent. In the case of a financially dependent child/grandchild who’s dependent due to a physical or mental impairment, a rollover is available where the balance is transferred to a RRSP, RRIF, an annuity, or a registered disability savings plan.

Now for the strategy….

The RRIF estate transfer strategy is designed to enhance the client’s after-tax estate value by withdrawing funds from the RRSP/RRIF (a tax-deferred plan) on a taxable basis and redirecting the after-tax funds into a permanent life insurance policy. Effectively you are melting down the RRSP/RRIF over a specified number of years, therefore triggering taxes. Subsequently, you then use the after-tax proceeds to purchase a permanent life insurance policy. Sounds counterintuitive? Why would we consider triggering a tax today when we can kick that “proverbial tax can” into the hopefully distant future? Well, assuming the individual doesn’t need their RRSP/RRIF for personal lifestyle goals and can create a better estate outcome, why not? At death, a life insurance policy pays out tax-free proceeds while the entire RRSP/RRIF balance is taxable.

In addition to the estate enhancement benefits, a RRIF Estate Transfer strategy can maintain creditor protection status (as would the RRSP/RRIF scenario) with certain limits of course…. but also provide a potential source of liquidity for a client while alive, assuming the policy is designed to include cash values.


Let’s now look at an example:

Bob and Lisa are ages 68 and 66 respectively a married couple, with two kids, who are also married. Bob has an RRSP portfolio worth $2 Million. Lisa’s RRSP is nominal due to being a member of a generous defined benefit pension plan for many years. In addition to being quite successful with their investment portfolio, they’ve also benefited from an inheritance from Lisa’s late mother. Having undergone a retirement planning analysis with their advisor it’s been determined that their RRSP is not needed to support their retirement lifestyle goals. By the time Bob reaches age 71 and he’s required to convert his RRSP into a RRIF, the balance grows to $2,382,032 assuming a 6% growth rate. Whether he needs the money or not, at age 71, Bob will have to take out his RRIF minimum of $125,771 and pay $62,886 in taxes based on a 50% marginal tax rate (see year 4 in diagram #1 below). Since they don’t need the money to fund their retirement lifestyle, they’ll simply reinvest the after-tax amount in a non-registered portfolio. If Bob dies after Lisa at age 71, based on the RRIF balance remaining and the non-registered portfolio subsequently created, he will owe just under $1.2 million in taxes and his estate will be left with just under $1.3 million (see year 4 in diagram #1 below). Should Bob die after Lisa at age 85, his total after-tax estate value would be just under $2.4 million (see year 17 in diagram #1 below).

As an alternative strategy, Bob and Lisa decide to begin melting down their RRSP today for 15 years and use the after-tax proceeds to purchase a joint last to die permanent life insurance policy with annual premiums paid for 15 years (see “total life insurance premium” column of $97,500/yr. in diagram #2 below). This strategy produces a net estate value of just over $3.6 million at Bob’s age 85 (see year 17 in diagram #2 below). That’s an increase of 50% or $1.2 million to the traditional RRIF net after-tax estate.


Diagram #1:

Traditional RRSP/RRIF scenario (reinvesting after-tax minimum withdrawal to a non-registered portfolio):


Diagram #2:

RRIF Estate Transfer strategy:

So once again, who’s this for? For individuals with ample net worth and projected retirement income, who will not require all their registered income in retirement. Redirecting some or all their after-tax RRSP capital into a tax-advantaged permanent life insurance policy can provide a considerable boost to their estate. They may not necessarily need the insurance as a risk management tool, but they may WANT IT due to the intergenerational wealth it creates.


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