More than once I've heard the advice that there is no longer any point in having a spousal RRSP because of the new pension income splitting rules. However, this is only partially true. Spousals RRSPs still make sense in some circumstances.
The origin of spousal RRSPs was a way to allow a higher income spouse to contribute to the lower income spouse's retirement savings. Basically, the lower income spouse opens a spousal RRSP, and the higher income spouse puts money in it. The amount contributed counts against the higher income spouse's RRSP contribution room and gives the higher income spouse the tax deduction.
The advantage of doing all this is to balance the incomes of the two spouses in retirement to reduce the amount of income taxes paid. However, recent tax changes allow spouses new opportunities to split pension income. In particular, anyone over the age of 65 can allocate up to 50% of a RRIF withdrawal as income for his or her spouse.
Note the restrictions here. Income splitting does not apply to RRSP withdrawals and can only be done after age 65. If you have reason to delay converting your RRSP into a RRIF past age 65, you won't be able to use income splitting on any withdrawals from the RRSP. Also, if you retire before age 65, you won't be able to split any withdrawals whether they come from your RRSP or your RRIF.
So, it can still make sense to set up and use spousal RRSPs to maintain maximum flexibility for minimizing taxes as you adapt to life changes and income tax rule changes.
You've touched on the important advantages of a spousal RSP. I hadn't really paid attention regarding income splitting for retirees on account of the eligible age being so much greater than my own. The restrictions are great enough that spousal RSPs are still a good alternative.
ReplyDeleteI guess it wouldn't make much difference for someone like the guy I was talking to last night. He joked that he was on the Freedom 85 program. Still, seems like it's a good idea to utilize the spousal RSP as long as one is in a stable relationship. Who knows when the pension splitting privileges could be revoked?
Shifting tax policy makes it hard to pick one path and stick with it, doesn't it?
@Gene: "Freedom 85", that's a good one. I'm not sure how much the stability of the relationship matters given that assets will likely be divided anyway in a break-up. I guess this will depend on the length of the relationship, whether there are children, and other factors.
ReplyDeleteShifting tax policies definitely present a challenge. Ever since the TFSA came into being I've suspected that various social benefits that currently ignore TFSA withdrawals will change over time to take into account TFSA "income".