Jayson Lowe explains how RRSPs trigger massive tax bills when you die. A $600,000 RRSP could cost your heirs $282,547 in taxes, leaving only $317,453. He walks through the math and suggests reviewing your beneficiaries and exploring other strategies to protect what you leave behind.
$200,000 per year
Federal: $42,131; Provincial: $25,917
$4,453
$127,500
About $9,006.70
Most people end up saving and working very very hard to save up into their rrsp. And I don't even know if you know that based on the amount that you save. The more that you save, the more the government ends up getting their fair share of your income that you've saved from them. Are you aware of the dangers of deemed disposition for RRSPs? It's actually a very scary rule that you may not even know about as a Canadian when you pass away, especially when are the last person to pass away called second death. When you pass away, your RRSP is deemed to be cashed in. All of what you've saved up is included in your income for that year. This can result in a significant tax bill for your beneficiaries that can eat into the money that you've saved up which was supposed to be inherited from you. But there are ways to protect your loved ones from this tax hit. Now before I dive into that, I think it's really important for you to actually see the impact of what the most common pieces of advice related to contributing to an RRSP to save more taxes because you will be in a lower tax bracket in the future when you withdraw it. Well, one of the main things that is really important to know is that you don't actually know when you will pass away. And Nelson Nash, a mentor to many, shared a golden rule which is to rethink your your thinking. So let's walk through an actual example of what that looks like when you follow the most commonly accepted advice of being a high income earner saving into an RRSP without rethinking your thinking. Now the numbers that you're going to see are completely estimates but they gives you a good range or an idea of what I'm actually talking about. So the first part is here's the individual earning $200,000 per year. Now when it comes to federal taxes, of that 200,000 42,131 is used to pay federal taxes. 25,917 is used to pay provincial taxes. And then there's deductions that are taken from the 200,000 of $4,453 in the form of CPP and EI. In total, your after tax, after you've paid the government right off of your paycheck would be 127,500. That's the money that is going to be left available for you to to spend and pay for bills or pay for other responsibilities that you have. Now the most common piece of advice that People will share is this individual's in a high income tax bracket. So let's pay less taxes and contribute it to into an rrsp. Now the first thing to really highlight is an RRSP is not actually paying less taxes, you're actually deferring taxes. So of the 20,000 that went into the RRSP in the form of a contribution, the individual is able to save 9,006 70. So almost $10,000. So, so that almost $10,000 is making the individual today pay less taxes because before they would have paid 72,500 and instead with that refund of almost 10,000 is $62,000. So 50% of a refund for the 20,000 contribution. That sounds pretty awesome, right? Well, let's take a look at what happens at deemed disposition at death. Now at deemed disposition at death. Now they've saved up to $600,000 into their RRSP. And because we don't know when the best before date let say the person has passed away and according to the deemed disposition rule from the CRA or the Income Tax act, the full amount of the 600,000 would be included as income. So let's take a look at the tax impact on when $600,000 is included on that individual's income. Now here you will see that the individual had a total income from that RRSP get included into their income for that year of $600,000. 174,000 goes to the federal government, 108 goes to the provincial government. And total in total that was 282,547. And after what's left is 317,453. So the total amount that the government actually received from that 600,000 is almost 50%. Now I don't know about you, but most people end up saving and working very very hard to save up into their rrsp. And I don't even know if you know that based on the amount that you save. The more that you say, the more the government ends up getting their fair share of your income that you've saved from them. Before you make a decision, take the time to review your beneficiaries and consider the tax implications for them. Don't let the government take a larger share of your hard earned savings than necessary. It's time to rethink your thinking and keep taxes away from your wealth. Don't let the government take a larger share from you. Instead, take control of your financial future by becoming your own banker. Instead of putting your loved ones in a position to pay for your debts and taxes, you can leave a bonus behind for your loved ones. Click the video link to learn more about the truths about an RSP that many don't even know.
