How to Maximize the Flexibility Spousal RRSPs Add to Retirement Planning

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The attribution rules normally apply when contributions made in the current year or the two previous years are withdrawn from a spousal RRSP, making the withdrawals taxable in the hands of the contributor. But they do not apply to withdrawals made under 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 this does not mean that registered retirement savings plans (RRSPs) of the spouse or common-law partner n still have no place in the retirement of many couples. Planning.

You can only split pension income from age 65, says Patrick Briscoe, financial adviser at Bayswater Wealth Management at IPC Investment Corp. in London, Ontario.

“If you plan to retire before age 65 and you withdraw all the income from the RRSP of one of the spouses, [that spouse] I can’t split it yet, [so] they have to claim all that income,” he stresses.

“Another scenario where spousal RRSPs might make sense is if a spouse has other sources of income that would not be allowed to be split. [such as] a large amount of non-registered investments.

Briscoe says that while people are aware of spousal RRSPs, many don’t fully understand how they work. He initiates conversations with clients on the subject by explaining who owns the account and will be taxed on the funds withdrawn (the spouse) and who uses their contribution room and gets the tax deduction (the contributor).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 is therefore likely to have a higher income in retirement. However, he adds that there are situations where spouses have similar current and projected incomes and can still benefit from a spousal RRSP.

“One of them would be a series of planned or unplanned years with low income. This could be parental leave, for example, or unemployment for health reasons,” says Briscoe. “If that were to happen… it might be a good idea to open a spousal RRSP to [that spouse to] allow them not to fall too far behind in their retirement savings.

Plus, couples saving to buy a first home can use the Spousal RRSP to ensure both spouses can withdraw the maximum $35,000 from their RRSPs to participate in the Home Buyers’ Plan (HBP) , he said.

The attribution rules normally apply when contributions made in the current year or the two previous years are withdrawn from a spousal RRSP, making the withdrawals taxable in the hands of the contributor, but they do not do not apply to HBP withdrawals.

What’s mine is yours?

While there may be good financial planning reasons for a spousal RRSP, not all spouses are comfortable handing over control of assets to their partner.

With a spousal RRSP, the beneficiary spouse can choose to withdraw funds at any time and, if the contributing spouse does not agree, this can be a major source of conflict.

“It might even be with good intentions,” Mr. Briscoe says. “With children, couples may have differences of opinion about paying school fees. One of them says, “No, I don’t want to cover it up.” They have to teach themselves how to manage money. The other might think, ‘No, I want to pay for their education because I never had that opportunity…and I don’t care what you say, I’m taking this money from the spousal RRSP.’ »

While early withdrawals can be a risk, Melissa Caschera, an investment advisor at BMO Nesbitt Burns Inc. in Windsor, Ont., points out that the other big worry some clients have is unfounded — that the spouse with the RRSP spouse can keep it all if a couple separates. An RRSP of any kind (spouse or not) is matrimonial property that is divided in the event of divorce.

Still, she says it’s important to be mindful of hesitant spouses and approach the conversation with sensitivity.

“With more knowledge, they sometimes become more comfortable with it, and it’s up to the counselor to determine if they need to have a private conversation with someone in the relationship,” Ms. Caschera says.

“Sometimes it doesn’t seem fair and they just have to keep everything in their name, and that’s fine.”

Advisors just need to make sure the person 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, says Caschera.

However, “if you’re going to make more money in the future, you don’t want to use up all of your RRSP contribution room,” she says. “You don’t want to waste it in low-income years.”

And because life happens, it’s important to be prepared to adjust a spousal RRSP strategy.

For example, if a couple is considering early retirement funded in part by spousal RRSP withdrawals, it makes sense to stop spousal RRSP contributions in three years to avoid spousal RRSP withdrawals being attributed to the spouse. contributing.

In retirement, circumstances can also change. Before pension income splitting takes effect at age 65, couples can increase or decrease the stream from a spousal RRSP to equalize a couple’s income.

Caschera says it’s also worth considering withdrawing more than necessary from a spousal RRSP during low-income retirement years (for example, before you start drawing pension income) to reduce risk. that a widow or widower ends up with heavy tax bills on spousal RRSP income that cannot be split with a partner.

“[A spousal RRSP] is tax efficient, but it can also be very flexible,” says Ms. Caschera.

“It’s a great tool…that most people can benefit from, but there’s always more planning, more discussion to be had about how it’s going to fit in [and] how you are going to get the most out of it.

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