A spousal Registered Retirement Savings Plan (RRSP) is all about paying less tax during retirement. The higher income spouse contributes to the plan during working years, but withdrawals in retirement are favourably taxed in the hands of the lower income spouse.
The value of this strategy, however, has been questioned ever since 2007 when the government introduced pension income splitting. Especially since eligible pension income includes withdrawals from a Registered Retirement Income Fund (RRIF), which the spousal RRSP becomes. So you may be asking yourself, “Should I get a spousal RRSP?”
The answer is yes, in specific cases. Provided the primary income earner is in the higher tax bracket in retirement, there are three scenarios when a spousal RRSP proves valuable.
Retiring before 65
Let’s say you retire before age 65, have a spouse in a lower tax bracket, and you want to split retirement income with your spouse to save tax. Under pension income splitting rules, you must be 65 or older to split RRIF income with a spouse. However, withdrawals can be made from a spousal RRSP at any age to provide retirement income that’s taxable in the lower tax bracket.
You do need to plan on leaving time between your last spousal RRSP contribution and your first withdrawal from the spousal RRSP or RRIF. The waiting period is two full calendar years after the year you made the last spousal RRSP contribution. If you do make a withdrawal in this period, funds will be taxable to the spouse in the higher tax bracket. There’s one exception – you can make spousal RRIF withdrawals during the waiting period up to the minimum annual withdrawal amount, taxable to the lower income spouse. This attribution rule applies to all ages, before and after 65.
Split more than 50% of income
A retiree can split up to 50% of eligible pension income with a spouse, which includes RRIF income. But, depending on your tax situation, you may wish to split more than 50% of retirement income. You can achieve this with a spousal RRSP that you convert to a spousal RRIF. Annual withdrawals of any amount can be made from the spousal plan, taxed in the hands of the lower income spouse.
Make RRSP contributions beyond 71
Normally, you cannot contribute to an RRSP after the year you turn 71. But you can if you have a spousal RRSP and your spouse is younger than you. If you have RRSP contribution room from earned income or carry-forward room, you can contribute to your spousal RRSP until the end of the year your spouse turns 71.
If you want to find out whether you could benefit from opening a spousal RRSP, talk to me today.