Do Spousal RRSPs still make sense?

Retirees should remember October 2007 because the government introduced one of the most significant tax changes to income splitting rules. The new rule allows retirees a chance to give some of their pension income to their spouse. If you don't have a spouse, the new rules are not relevant to you. One-third of Canadians are part of a formal pension plan. As soon as these people start collecting their pension, they can split up to 50% of their pension with their spouse.

For the other two-thirds without pensions, the rules still allow you to split your RRSP income but only after the age of 65. In other words, if you are over the age of 65, and you start to withdraw income from your RRSPs through a RRIF or annuity, you can give your spouse up to 50% of that income. Prior to age 65, the only way to take advantage of pension splitting is if you have income from a pension plan.

Pension splitting is great news for couples in retirement because it means a lot of potential tax savings. This year will be the first year where return will be completed with this new rule.

Prior to the new pension splitting rules, the main way retirees could do any sort of income splitting was through spousal RRSPs. Does this now mean that spousal RRSPs will become obsolete?

What are spousal RRSPs?

A spousal RRSP is an RRSP where one spouse or partner has contributed and the other spouse or partner is the owner of the plan.

The ideal situation for spousal RRSPs is when there is lots of disparity of post retirement income between spouses. Spousal RRSPs give people the opportunity to push retirement income from a spouse in a high tax bracket into the hands of a spouse with lower income.

Are spousal RRSPs obsolete?

Spousal RRSPs may have lost some of their allure due to the pension splitting but there are still situations where the spousal RRSP will provide a valuable benefit.

Here's a hypothetical example where spousal RRSPs still make sense. Ken is a member of a pension plan and still has the ability to make RRSP contributions. Ally, his wife, works but does not have an employer-sponsored pension plan. Ally plans to retire at age 55. If Ken continues to work past age 55, he won't be able to split any income under the new rules unless he contributes to a spousal RRSP. Even if Ally plans to work past age 55, the spousal RRSP still gives the couple maximum flexibility.

Another example is for couples that are not part of a pension plan but plan to retire before the age of 65. Splitting income before the age of 65 can only happen with pension income. Therefore, spousal RRSPs become very important to tax planning for anyone who plans to retire early.

At the end of the day, even with the new pension splitting rules, spousal RRSPs still have a place in retirement planning and income splitting. These examples accentuate the importance of individual planning. Because the pension splitting rules are so new, there is a lot of confusion about how they work and how they will affect couple in retirement. Everyone has unique circumstances so plan accordingly. When in doubt seek help and advice from professionals.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites and Clearpoint Benefit Solutions.

One Response to Do Spousal RRSPs still make sense?

  1. I earned about 27K this year and my wife earned 85K+. I expect to make significantly more in the future and already have about 60K in my RRSP. My wife has a pension so really won’t need to add any more to her RRSPs so she should have lots of RRSP room (as will I) in the future.

    My question is this: Does it make sense for me to withdraw 10K from my RRSP and take a tax hit of about 20%, give this $8000 to my wife and she can put it, and the tax deduction she derives from it (8000 * 1.34) = 10,720 into a spousal RRSP for me. I understand I couldn’t touch it for 3 years but I’m more than fine with that.

    This seems a bit of a no brainer to me. Am I missing something? Seems like an easy way to make $700 for about an hour of paperwork.

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