Estate planning: What happens to your LIRA when you die

What taxes do my LIRA beneficiaries have to pay?

Be aware of tax bills

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Q: Is the tax rate on a LIRA the same as the RRIF if I die and the beneficiaries are my children?

—Brian

A: First, Brian, I want to clarify the difference between a LIRA and other registered accounts. A Locked-In Retirement Account (LIRA) or Locked-In Retirement Savings Plan (LRSP) is an RRSP created by a transfer of money from a pension plan upon leaving that pension. It may have been from a Defined Contribution (DC) pension plan where you bought mutual funds during your employment or it may have been from a Defined Benefit (DB) pension plan where you chose a lump-sum payout instead of a future monthly pension payment.

A LIRA is much like a regular RRSP. You can buy the same investments. The investments grow tax-deferred. Withdrawals are taxable in the future. One difference is that there are maximum annual withdrawals for a LIRA, whereas an RRSP has no maximum withdrawals. You can only take withdrawals from a LIRA prior to age 55 in special circumstances, whereas RRSP withdrawals can be made at any time. Both RRSPs and LIRAs must eventually have minimum withdrawals that begin no later than age 72.

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By age 71, RRSPs or LIRAs must either be converted to RRIFs (Registered Retirement Income Funds) or LRIFs (Locked-In Retirement Income Fund) or used to purchase an annuity. You can convert your accounts to a RRIF or LRIF prior to age 71 if you want to begin withdrawals earlier.

A withdrawal from any registered account attracts the same tax rate, Brian – full income inclusion – in most circumstances. There are exceptions when you take withdrawals under the Home Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP), for example, but these don’t generally apply to someone in retirement.

There are nuances like the $2,000 pension income amount, which is a non-refundable tax credit on your tax return for RRIF / LRIF withdrawals, but not RRSP / LIRA withdrawals.

But whether it is during your life or on your death, an RRSP, RRIF, LIRA or LRIF withdrawal is fully taxable, Brian. The actual tax payable will depend on your other sources of income for the year.

On death, if you leave your registered account to your spouse or common-law partner, the funds can be transferred on a tax-deferred basis to their registered account. The government will get their share of tax eventually, whether the surviving spouse or common-law partner takes withdrawals during retirement or the full account value is eventually taxable on their death.

When a registered account is payable to anyone other than a spouse or common-law partner on death – like your children, in your example, Brian – your account is fully taxable in the year of your death. The value of your account on your date of death is added to your other sources of income for the year and tax calculated accordingly.

The one exception is if your RRSP is left to financially dependent children. If they are minors, a registered account can be rolled over on a tax-deferred basis to purchase an annuity with payments made through age 18. The payments would be taxable to the children. If you have a child who is physically or mentally infirm, your RRSP can be rolled over on a tax-deferred basis to an RRSP, RRIF, life annuity or Registered Disability Savings Plan (RDSP) for that child. An RDSP is subject to the $200,000 lifetime contribution limit.

If your children are the direct beneficiaries of your registered accounts and are named beneficiaries, it’s important to keep in mind your estate is responsible for the tax payable, barring any of the above exceptions. So, depending on what other assets are in your estate to pay that tax and to pay other bequests or distributions to beneficiaries, you will want to make sure that’s all considered in your estate planning, Brian.

The looming tax payable on registered accounts on death is a reason to contemplate withdrawals prior to age 72 or withdrawals exceeding the minimum required withdrawals in certain circumstances. There is a fine balance between paying tax today to avoid tax tomorrow, but this consideration is an important part of your retirement, tax and estate planning.

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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.


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