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Finance February

When it’s Splitsville, what happens to your RRSP? Add to ...

I’ll take the kids and the house. You take the RRSPs.

Divorce, Canadian-style, often includes a discussion of who gets the money that one or both spouses socked away into an RRSP. Dorothy Linden, a certified financial planner and financial divorce specialist in Perth, Ont., has worked with clients leaving a marriage and knows how hard it can be for separating couples to figure out what to do with their retirement savings.

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“I see different situations – like a couple in their 40s with RRSPs, a house and other assets, and one says, ‘You take the RRSPs while I keep these other assets,’” says Ms. Linden, who runs a company called Linden Financial Planning. “It may sound like a good deal because you’re getting this big chunk of savings, but if you have no cash and three months later you need to get the car repaired, then it’s not so good, is it?”

While family law across Canada calls for a 50-50 split of matrimonial property, couples don’t necessarily need to split each asset right down the middle. And many don’t, says Ms. Linden, choosing instead to allocate certain types of assets to each spouse in a way that gives both parties roughly the same dollar value in the end.

The tax implications inherent in an RRSP should make parting couples pause for thought, says Tracy Theemes, a certified financial planner and co-owner of Sophia Financial Group in Vancouver.

“There’s a lack of understanding of what an RRSP really is,” says Ms. Theemes, a financial divorce specialist.

“It’s a tax holding structure. With an RRSP, you have a relationship with the CRA (Canada Revenue Agency), and that’s a distinct difference from other types of assets.”Dividing or transferring an RRSP during a divorce does not trigger a tax bill or credit for anyone, but cashing it out will, says Ms. Theemes. That’s why it’s important for divorcing couples to make sure they’ll have enough cash to take them through the transition period after separation, and beyond.

Ms. Theemes says she usually advises couples to just divide all assets down the middle – RRSPs, other investments, and cash from the sale of the family home.

“Especially in high-conflict splits, that’s the best thing to do,” she says.

But not everyone agrees with this approach, especially where the family home is concerned, says Ms. Theemes. Women, she notes, tend to be more attached to their homes and will often opt to take the house while forsaking the RRSP and other investments.

Even in hot housing markets, such as Vancouver, this isn’t always a good idea, says Ms. Theemes.

“It’s an emotion-based decision that’s not always in the best financial interest of the woman,” she says. “Here in Vancouver, we’ve seen many women who are ‘over housed’ – they’re in properties that are more expensive than they should be able to afford, and by hanging on to them, they’re bankrupting their retirement.”

This is especially dangerous for spouses who haven’t worked and won’t be receiving anything from the Canada Pension Plan or from an employer-sponsored pension, says Vern Hyde, a financial planner and owner of Financial Solutions in Medicine Hat, Alta.

It’s a good idea to negotiate for at least some of the RRSPs, he says.

“For people who don’t have a pension, it might be wise to take some RRSPs and continue adding to it,” says Mr. Hyde, also a financial divorce specialist.

Taking a big chunk of RRSP money could make sense for a spouse planning to buy a house in the near future, and who has never used the Home Buyers’ Plan, which allows Canadians to withdraw up to $25,000 from an RRSP without incurring taxes, says Ms. Linden.

Being able to borrow RRSP funds to study, under the Lifelong Learning Plan, could also be an attractive prospect for those hoping to start a new post-divorce career. But whether they’re cashing out to buy a house or go to school, one thing remains the same, says Ms. Linden: The money needs to be put back into the RRSP to ensure the tax stays deferred.

“It’s really important, when you’re dividing the family assets, to think about not just what things look like today but to visualize yourself two, three, five years down the road,” she says. “Will you be buying a house? Will you be working and possibly making a higher income than you’re making today? Are the kids still going to be in university?”

Most Canadians hire a lawyer to handle their divorce; Ms. Theemes says it’s a good idea to also get help from a financial adviser during this time.

“You need someone to crunch the numbers for you and play with different scenarios to see which one would work best for you,” she says.

When love comes calling again and puts remarriage on the horizon, it’s important to see both a lawyer and financial adviser, says Ms. Theemes. Who gets the RRSPs should be part of the discussion, she says, especially when there are children from previous relationships.

Naming your kids as beneficiaries of your RRSP won’t necessarily prevent it from being claimed by your surviving spouse, says Ms. Theemes. Her advice: a prenuptial agreement, as unromantic as it may seem.

“When people are going into their second or third marriage, they’re usually bringing in assets that they wouldn’t usually have if they were in their 20s and getting married for the first time,” she says. “You need to consult your family lawyer, and your financial planner.”

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