Gifts of Retirement Fund Accumulation

Retirement funds constitute one of the major assets of most people. Billions of dollars currently reside in registered retirement funds, as workers prepare for the years when they no longer will have a steady paycheque. Individuals enrolled in a registered retirement savings plan (RRSP), have already converted their RRSP to a registered retirement income fund (RRIF), or have assets in a Tax Free Savings Account (TFSA) can make a charitable gift of all or a portion of any retirement funds remaining at death.

If you are married and your spouse survives you, he or she would ordinarily be the beneficiary of your retirement funds. If you had an RRSP at the time of your death, your spouse could keep the funds in a tax-deferred plan. If you had already converted to an RRIF, your spouse could continue to receive payments, and those payments would be taxed only when received. If you have under-age children at the time of your death, the retirement funds can be rolled tax-free into an annuity paying them instalments until age 18.

If you are not survived by a spouse, and if you have no children or already have made arrangements for your children, leftover retirement funds can make an excellent charitable gift because the charitable tax credit will offset the tax otherwise payable on the distribution.

To illustrate:

A single woman dies at age 75 and has named The PPCLI Foundation as beneficiary of her remaining RRIF funds (her father had served in the Regiment). The Foundation receives the $30,000 remaining in her RRIF. The tax on her RRIF funds (46 percent combined rate) is $13,800 but the tax credit on the $30,000 contribution is also $13,800, so the tax credit offsets the tax. Thus, she is able to transfer her remaining retirement funds without ever having them taxed.

Gifts That Give Back

Some gift arrangements can be compared to a farmer who gives his orchard to a charity while keeping the fruit during his lifetime. He may choose to receive a certain number of apples each year (a gift annuity), or to keep as many—or as few—apples as the trees produce (a charitable remainder trust).

Gifts that provide lifetime income to the donor are a type of future gift, but with a very important difference. Unlike bequests — which are revocable gifts that allow the donor to change his or her future provision — annuities, trusts, and other life income gifts require an irrevocable transfer of assets from the donor to the charity. These irrevocable gifts provide immediate tax benefits, although the donation receipt is not as large as for outright gifts.

Retirement Funds for Saving and Giving

An RRSP is the best way to accumulate funds for retirement. Not only is the amount invested each year sheltered from taxation, but also earnings on assets in the fund are not subject to tax. Thus, it is advantageous to contribute as much as possible as early as possible each year to an RRSP.

Comparing RRSPs and other investments

Compare, for example, growth of funds in an RRSP and in a fully-taxable investment. For simplicity, the combined marginal tax rate is assumed to be 50 percent.

RRSP funds are taxable when withdrawn, but even if they were withdrawn in a lump sum at the end of twenty years and taxed at 50 percent, the after-tax dollars ($33,637) would still be considerably more than the accumulations in an investment where earnings have been taxed along the way.

Because the tax sheltering is so attractive and be-cause sizeable contributions can be made (currently up to $16,500 per year), billions of dollars are invested in RRSPs.

Some individuals start taking distributions from their pension plans immediately upon retirement. Others, not needing the money now, defer payments as long as possible. They like to continue taking advantage of the income tax deferral growth accorded such funds. Further, they may defer payments because they regard a pension account as a financial reserve, to be tapped only when needed.

Distributions, however, cannot be delayed beyond age 71. By that time you must elect either a retirement annuity or an RRIF (Registered Retirement Income Fund.) The annuity offers the advantages of guaranteed payments and freedom from worry about how funds should be invested. The RRIF, however, is more flexible. You can control how the money is invested, and you can withdraw any amount each year so long as you withdraw at least the minimum. Because of this flexibility more people convert their RRSPs to RRIFs than to retirement annuities.

Charitable gifts with retirement funds

If a spouse survives you, he or she would ordinarily be the beneficiary of your retirement funds. If you had an RRSP, your surviving spouse could keep the funds in a tax-deferred plan. If you had already converted to a RRIF, your surviving spouse could continue to receive payments, and they would be taxed only as received. If you had opted for a joint-and-survivor annuity for you and your spouse, he or she will receive payments for the balance of his or her life. In the event underage children survive you, the retirement funds can be rolled tax-free into an annuity paying them installments until age 18. If the dependant is disabled, a tax-free rollover to an RRSP, annuity or RRIF is permitted.

Possibly, however, you will not be survived by a spouse and have already made arrangements for the children. In that case, leftover retirement funds make an excellent charitable gift because the charitable tax credit will offset the tax on the distribution. Leaving the funds to a beneficiary, who is not a spouse or dependent child or grandchild, generally would cause the full value of the funds to be taxed in the year of your death, but with the charitable gift you preserve the funds intact for a Foundation or charity whose work you want to support.

The recommended procedure is to designate the Foundation or charity as beneficiary of all or a portion of your RRSP and RRIF funds.

Example:

Betty G., a widow, dies at age 75 and leaves $30,000 of her RRIF funds to the Foundation.

• Tax on RRIF funds (48% combined rate) $14,400
• Tax credit (Combined credit is 48% of gift and entire bequest is creditable.) $14,400
• Net tax on distribution $00,000

The tax credit will entirely offset the tax on the distributions. That is because the creditable amount of a charitable bequest is 100 percent of net income. Thus, if you choose to leave your leftover retirement funds for the Foundation or other charity, no part of them will be consumed by taxation.

Retirement funds and giving

A charitable gift is one method of assuring that all or most of the funds you spent a lifetime accumulating are used for the purposes you choose.