When I started writing I wrote many paragraphs on the importance of Spousal RRSPs. This vehicle enables being in a lower tax bracket when you retire. Many folks face a problem. If an RRSP is only in the main breadwinner’s name, the tax rate on withdrawals from the RRSP (when converting to the RRIF) may be higher than the rate at which the money was initially deposited. It seems wrong when you pay the government too much tax on things. I always like to try to minimize my tax payments, but that may be just my thing. Are pensions and spousal RRSPs complimentary?
When I first wrote about this (in 2005), my scenario was:
- I had a pension from my employer (BNR/Nortel). Yes, later I learned how foolish that thought had been. However, I learned this only long after planning things.
- My wife might have CPP but that would be her sole income.
At that time, the option to split pension income was unavailable. Therefore, the only way to transfer money into my wife's hands was by contributing to a Spousal RRSP. A Spousal RRSP counts against the contributor's RRSP contribution room. However, when money is withdrawn from the account, it is taxed in the hands of the spouse. This is a simplified explanation. In reality, the funds are only considered to be in the spouse's hands three years after the deposit. This method was the only way to "split income" and reduce the overall tax burden.
Currently, life is better for retirees in that they can:
- Split their private pension income (this is a simple act on your tax forms, I believe)
- Split your CPP, a much more complicated scenario
I have read where folks are saying that a Spousal RRSP is now obsolete for those with pensions. However, I disagree.
My wife currently has a small private pension. She also receives CPP. I can simply use the Spousal RRSP as another means to even out our income levels at retirement. Before I retire, it is another way to put money in my wife's hands as well, as the funds in there are "hers" (in the eyes of the CRA) after 3 years, so if there was a need for my wife to have income, aside from me, that is another option as well.
Where Does the Spousal RRSP Stand?
Question for my smart readers (that is all of you), what is your thinking on Spousal RRSPs? Still a good idea? Obsolete ?
Do same-sex couples get to take advantage of Spousal RRSPs? Anybody?
I am very pleased to read this article and the comments made as I felt that the blogosphere disagreed with my belief this was a smart idea. I started a spousal RRSP many years ago before income splitting was allowed, but as my wife will only collect OAS after 65 due to illness during her life not allowing her to work. Also, her being younger than myself will impact any split capability for a few years also. As mentioned in article and comments there are many valid reasons this is still a valid financial strategy and I’m very glad you all responded to make that point to those poo pooing the idea as old fashioned or not needed in this era.
Well stated ðŸ‘
I think there is an emotional element that shouldn’t be downplayed. If the higher-income earner places money in the lower-earner’s spousal RRSP, that feels like a levelling move to the lower-earner. One doesn’t know what will come or go with regards to income splitting, but making both partners feel on even footing now has real value.
I would think that is important aspect as well.
It still makes sense. Max out the TFSA of course but that is not enough. DW can draw $11,000+ per year and pay no tax. With the negative tax on dividends on the first tier of salary here in BC she should be able to draw down much more. I will have to game how much when the time comes (in 3 years). Even a few bucks paid taxes is much better than what I would be paying.
Spousal RRSPs are still useful if the spouses have different retirement dates and the working spouse holds all the RRSP assets.
If there is a big delta in salaries, yes, these accounts work in my opinion. Otherwise, not worth it. Best to max out all TFSA room. Tax-free is better than tax-deferred in my book.
Yes, I think I should have added the TFSA in the current equation, my bad.
Spousal RRSPs are still useful for couples who retire before age 65 and want to live on their RRSP withdrawals. After age 65 the income-splitting rules kick in.
Point well made, so if you were looking for early retirement, your RRSPs, could be the buffer, and it would be better if they were split so that Tax levels could be lower.
Using the Spousal RRSP to use the HBP.
After (meaning after mortgage, which comes after buying a house ..), will be using the spousal RRSP because of the way we have our finances set up. DW’s side is couch potato, my side is dividend. Using it to try to keep things balanced.
TFSAs have no allocation rules and are overall easier to understand, which makes spousal RRSPs less relevant.
Yes, I forgot to mention the fact that the TFSA has changed the model as well, good point.