Now that couples can split pension income, is there any reason to open a spousal registered retirement savings plan?
Yes, spousal RRSPs still have several advantages. Before we get into them, let's quickly review the rules on pension income splitting.
As discussed in a previous column (read it here), you can transfer up to 50 per cent of eligible pension income to a spouse. For tax purposes, the amount will be deducted from the income of the spouse who actually received the eligible pension income and added to the income of the other (presumably lower-income) spouse, thereby lowering the overall tax hit. (Both spouses must be Canadian residents for tax purposes).
What types of pension income qualify? If you are 65 or over and receive payments from a registered pension plan, registered retirement income fund (RRIF), life income fund (LIF), locked-in retirement income fund (LRIF) or lifetime annuity in a registered plan, the income will be eligible for splitting. The income portion of certain annuities in a non-registered account may also qualify.
However, if you are under 65, generally, only payments from a registered pension plan will qualify for pension income splitting. RRIF, LIF, LRIF or annuity income will only qualify if received as a result of the death of a spouse.
Even with the available pension income-splitting options, "spousal RRSPs are still valid," said Jamie Golombek, managing director of tax and estate planning with CIBC Wealth Advisory Services.
Typically, the higher-income spouse contributes to a spousal RRSP for the lower-income partner. The higher-income spouse uses his or her own RRSP contribution room and receives the tax deduction, but the lower-income spouse is taxed when the funds are eventually withdrawn.
One major benefit of spousal RRSPs is that they let you split even more income than you otherwise could, Mr. Golombek said. With a regular RRSP that is converted to a RRIF, only 50 per cent of the income can be split with a spouse. But with a spousal RRSP, all of the eventual withdrawals are taxed in the lower-income spouse's hands. This can be a big help if your goal is to have equal incomes in retirement and keep your tax bill as low as possible, he said.
Spousal RRSPs are especially beneficial if the spouse in a higher tax bracket has other sources of income that aren't eligible for pension splitting, such as a large investment portfolio or rental or employment income, he said.
A spousal RRSP also provides more flexibility for people who want to retire early. Many types of pension income splitting are available only after the transferring spouse turns 65, but with a spousal RRSP there is no such restriction. (It's important to remember, however, that if the funds are withdrawn from a spousal RRSP within three years of the contribution, all or part of the income could be taxed in the hands of the contributor. For more on spousal RRSP attribution rules, see http://bit.ly/1pWf3eu)
Yet another benefit is that, although you cannot contribute to your own RRSP after the year in which you turn 71, you can – if you have the RRSP room – continue making contributions to a younger spouse's RRSP until Dec. 31 of the year that he or she turns 71. That's a plus for couples in which one spouse is much younger than the other.
Finally, spousal RRSPs can be useful for couples planning to purchase a home using the Home Buyers' Plan. If one spouse is working and the other is enrolled in school, for example, the higher-income earner could contribute to his or her own RRSP and also to a spousal RRSP, potentially allowing both spouses to later withdraw the maximum of $25,000 each – or $50,000 in total – under the HBP. The advent of tax-free savings accounts provides another way to save for a down payment, but the HBP still has a place, Mr. Golombek said.
Bottom line: "Spousal RRSPs still play a huge role," he said.