Pensions and Spousal RRSPs

in RRSP

When I started writing I wrote many paragraphs on the importance of Spousal RRSPs, to enable being in a lower tax bracket when you retire. A problem many folks have is that if you only have an RRSP in the main breadwinners name, the tax rate the money comes out of the RRSP (into the RRIF) may be higher than when the money went into the RRSP, which seems wrong (in that you pay the government the maximum 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:

  1. I had a pension from my employer (BNR/Nortel) (yes later I learned how foolish that thought had been, but only long after planning things).
  2. My wife might have CPP but that would be her sole income.

At the time, the concept of splitting pension income was not on the table, so the only way to put money into my wife’s hands, was to put money into a Spousal RRSP. A spousal RRSP, counts against the contributors RRSP room, however when the Account has money withdrawn from it, it would be taxed in the spouses hand (this is a gross over simplification, in fact the money is only in the spouse’s hands 3 years after deposit). This was the only way to “split income” and thus lower the tax burden.

Currently, life is better for retirees, in that they can:

  1. Split their private pension income (this is a simple act on your tax forms, I believe)
  2. Split your CPP, a much more complicated scenario

So I have read where folks are saying that a Spousal RRSP is now obsolete for those with pensions, but I disagree.

Currently my wife has a small private pension, along with CPP, so 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?

{ 12 comments }

  • Murray January 3, 2015, 8:13 AM

    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.

    Reply
  • Heather October 10, 2014, 4:16 PM

    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.

    Reply
    • bigcajunman October 10, 2014, 5:28 PM

      I would think that is important aspect as well.

      Reply
  • DJ October 10, 2014, 2:56 PM

    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.

    Reply
  • Brian So October 6, 2014, 10:14 PM

    Spousal RRSPs are still useful if the spouses have different retirement dates and the working spouse holds all the RRSP assets.

    Reply
  • My Own Advisor October 6, 2014, 7:45 PM

    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.

    Reply
    • bigcajunman October 6, 2014, 8:52 PM

      Yes, I think I should have added the TFSA in the current equation, my bad.

      Reply
  • Michael James October 6, 2014, 10:39 AM

    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.

    Reply
    • bigcajunman October 6, 2014, 11:06 AM

      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.

      Reply
  • aB October 6, 2014, 10:06 AM

    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.

    Reply
    • bigcajunman October 6, 2014, 10:30 AM

      Yes, I forgot to mention the fact that the TFSA has changed the model as well, good point.

      Reply

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