Beware! Not naming your Spouse as Beneficiary to your RRSPs can cost you Big Bucks

I wanted to share an real life example of the impact of not naming your spouse as a beneficiary of your RRSPs. Many Canadians use RRSPs to save for their retirement and overtime there could be a substantial amount of money in this plan. I wanted to point out that it is very important to pay attention to who you name as a beneficiary to RRSPs.

If you are married it is advisable to name your spouse as the beneficiary instead of your children. The main reason is because of taxes. Upon the death of the RRSP accountholder there is a deemed disposition where the entire value of your RRSP is included as income in the year of death. If however you name your surviving spouse as the beneficiary there is a tax free rollover of your RRSP to your spouse.

I just completed a tax return for a client who's spouse passed away however the beneficiary of the RRSP was the children. As a result her entire $200,000 value of RRSPs became taxable and resulted in half of it being paid to the Canada Revenue Agency. In addition the RRSP income elevated her income in the year of death and caused the government to clawback all of her Old Aged Security benefits received in the current year. The value of this was $7,000. So what normally is a $5,000 tax bill, increased to a $112,000 tax bill!

This post is to remind you to review your financial plan and who you named as beneficiaries on your RRSPs.