Attribution rules normally apply when contributions made in the current or previous two years are withdrawn from a spousal RRSP – making the withdrawals taxable in the contributor’s hands. But they don’t apply to withdrawals through the Home Buyers Plan.skynesher/iStockphoto
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Canadians have been able to split pension income, including withdrawals from registered retirement income funds since 2007 – but that doesn’t mean spousal or common-law partner registered retirement savings plans (RRSPs) don’t still have a place in many couples’ retirement planning.
You can only split pension income starting at age 65, says Patrick Briscoe, financial advisor with Bayswater Wealth Management at IPC Investment Corp. in London, Ont.
“If you plan to retire before 65 and you’re taking all of the income out of one spouse’s RRSP, [that spouse] can’t split it yet, [so] they have to claim all of that income,” he points out.
“Another scenario where spousal RRSPs could make sense is if one spouse has other sources of income that would not be allowed to be split [such as] a large sum of non-registered investments.”
Mr. Briscoe says that while people are aware spousal RRSPs exist, many don’t fully understand how they work. He starts conversations with clients around the topic by explaining who owns the account and will be taxed on withdrawn funds (the spouse) and who uses their contribution room and gets the tax deduction (the contributor).
He also explains that the most common scenario in which a spousal RRSP makes sense is when one spouse has a higher income now, and therefore is likely to have a higher income in retirement. However, he adds that there are situations in which spouses have similar current and projected incomes and can still benefit from a spousal RRSP.
“One of those would be either a planned or an unplanned set of years with low income. That could be parental leave, for example, or unemployment for health reasons,” Mr. Briscoe says. “If that were to happen … maybe it would be a good idea to open up a spousal RRSP for [that spouse to] allow them not to fall too far behind in their retirement income savings.”
In addition, couples who are saving up to buy a first home can use spousal RRSPs to make sure both spouses can withdraw the maximum of $35,000 from their RRSPs to participate in the Home Buyers’ Plan (HBP), he says.
Attribution rules normally apply when contributions made in the current or previous two years are withdrawn from a spousal RRSP, making the withdrawals taxable in the contributor’s hands – but they don’t apply to withdrawals through the HBP.
What’s mine is yours?
While there may be good financial planning reasons for a spousal RRSP, not all spouses are comfortable ceding control over assets to their partner.
With a spousal RRSP, the receiving spouse can choose to withdraw funds at any time and, if the contributing spouse doesn’t agree, that can be a significant source of conflict.
“It could even be with good intentions,” Mr. Briscoe says. “With children, couples may have differences of opinion on tuition payments. One says, ‘No, I don’t want to cover it. They need to learn on their own how to handle money.’ The other might think, ‘No, I want to pay for their education because I never got that opportunity … and I don’t care what you say, I’m taking that money from the spousal RRSP.’”
Although early withdrawals can be a risk, Melissa Caschera, investment advisor at BMO Nesbitt Burns Inc. in Windsor, Ont., emphasizes there’s no basis for the other big worry some clients have – that the spouse with the spousal RRSP will get to keep it all if a couple splits up. An RRSP of any kind (spousal or not) is a matrimonial asset that is divvied up in the event of a divorce.
Still, she says it’s important to be alert to hesitant spouses and approach the conversation delicately.
“With more knowledge, they sometimes become more comfortable with it, and it’s up to the advisor to identify whether they need to have a private conversation with anybody in the relationship,” Ms. Caschera says.
“Sometimes, it just doesn’t feel right and they just have to keep it all in their name, and that’s totally fine.”
Advisors just have to make sure that the individual understands that withdrawing money before age 65 wouldn’t be as tax-efficient, she adds.
Start early and stay flexible
The best plan is to start contributing to a spousal RRSP as early as possible, Ms. Caschera says.
However, “If you’re going to be earning higher dollars in the future, you don’t want to use up all your contribution room for your RRSP,” she says. “You don’t want to kind of waste it on lower-income years.”
And because life happens, it’s important to be ready to adjust a spousal RRSP strategy.
For example, if a couple is contemplating earlier than anticipated retirement funded partially by spousal RRSP withdrawals, it makes sense to stop spousal RRSP contributions three years out to avoid withdrawals from the spousal RRSP being attributed back to the contributing spouse.
In retirement, circumstances can change too. Before pension income splitting kicks in at age 65, couples can increase or decrease the flow from a spousal RRSP to even out a couple’s income.
Ms. Caschera says it’s also worth considering withdrawing more than needed from a spousal RRSP during lower-income retirement years (for example, before starting to draw pension income) to reduce the risk that a widow or widower will be left with big tax bills on spousal RRSP income that can’t be split with a partner.
“[A spousal RRSP] is tax-efficient, but it can be very flexible too,” Ms. Caschera emphasizes.
“It’s a very good tool … that most people can benefit from, but there’s always more planning, discussion to be had about how it’s going to fit in [and] how you’re going to make the most of it.”
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