Although pension income splitting rules have made retirement tax planning easier for couples, individuals expecting their spouse or common-law partner to be receiving comparatively lower income during retirement may still want to consider contributing to a spousal Registered Retirement Savings Plan (RRSP).
To split income from an RRSP with a spouse or partner, the account holder must be aged 65 years or older and all or part of the RRSP must first be converted to a Registered Retirement Income Fund (RRIF) or used to purchase an annuity to produce eligible pension income.
When Might a Spousal RRSP be Useful?
If a couple anticipates the lower-income spouse to withdraw funds from an RRSP before he or she turns 65 (for example, to help with costs associated with raising children, to take a sabbatical or to retire early), a spousal RRSP can be used to facilitate withdrawals at a lower tax rate.
You are allowed to contribute to your own RRSP until December 31 of the year in which you turn 71. However, if you still have RRSP contribution room and your spouse is younger than you, you may continue to contribute to a spousal RRSP until December 31 of the year in which your spouse turns 71, regardless of your age.
Year of Death
An executor may use the deceased’s RRSP room to make a contribution to a spousal RRSP in order to reduce the deceased’s final tax liability.
Home Buyers’ Plan (HBP)
If only one spouse has available funds and/or contribution room, contributions to a spousal RRSP can double the amount available for the Home Buyers’ Plan ($35,000 per person).1
Don’t Forget About the Attribution Rules
When withdrawing funds from a spousal RRSP, any contributions made to the spousal RRSP in the year of withdrawal or in the two previous years will be attributed back to the contributor and taxed at their marginal tax rate.
Example: Dave and Sue are married. Dave contributes $10,000 to Sue's spousal RRSP in February 2019 and claims the deduction on his 2018 tax return. If Sue withdraws funds from her spousal RRSP in 2019, 2020 or 2021, up to $10,000 of the amount withdrawn will be attributed back to Dave and included in his income rather than Sue's. If Dave had made the contribution in December 2018, the attribution rules would only extend to withdrawals made up to and including 2020.
Exceptions to the Attribution Rules
The attribution rules do not apply on mandatory RRIF minimum withdrawals or payments made from an annuity that was purchased with RRSP funds or approved withdrawals from a Home Buyers’ Plan or Lifelong Learning Plan (LLP). Keep in mind that RRIF minimums only apply the calendar year after converting an RRSP to a RRIF.
Withdrawals from a RRIF (not RRSP) attributed to a contributor who is 65 or older are considered eligible pension income that may be split (up to 50%) with a spouse or common-law partner. This may help offset up to 50% of any undesired income attributed on spousal RRIF withdrawals made within the three-year attribution period.
To end the attribution period sooner, make contributions to any spousal RRSP by December of the current year, rather than targeting the contribution deadline (the first 60 days of the following calendar year). This would have helped Dave and Sue in the preceding example.
As you approach retirement, or if you suspect needing to access registered funds in the near future, consider making personal rather than spousal contributions to provide flexibility and reduce the likelihood of any withdrawals from a spousal RRSP being attributed back to you.
For more information about spousal RRSPs, please contact your Odlum Brown Investment Advisor or Portfolio Manager.
1Budget 2019 proposes to increase the Home Buyers’ Plan withdrawal limit to $35,000 for withdrawals made after March 19, 2019 (up from $25,000).
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