Over the last few months, White Rock Senior Wealth Advisor Dave Lee has shared advice for getting the most out of your TFSA, RRSP, RRIF, and ‘locked in’ retirement accounts. Now it’s time to consider using spousal accounts to manage retirement savings and tax requirements.
“A spousal RRSP allows one person to contribute money to their partner’s RRSP. It’s typically used when one person is earning a higher income than their spouse,” Dave says.
The high-earning spouse receives a tax deduction when they make the contribution, but the invested money is registered in the name of the lower-earning spouse. This can mean significant savings for the couple when the high earner saves tax at a high rate and their spouse withdraws while in a lower tax bracket in the future.
“Couples cannot split employment income, but beyond age 65 they can split RRIF income to reduce taxes, so the spousal RRSP strategy is most valuable for those who are looking to split income before age 65.”
Using spousal RRSPs before retirement
Younger couples can also take advantage of spousal RRSPs. Consider Joe and Ashley, who just had a baby. Joe is taking parental leave while Ashley returns to her job as a surgeon. Joe is in the lowest income tax bracket while Ashley is in the highest. Provided that all the attribution rules have been followed, Joe can withdraw some of the couples’ RRSP savings at a 20 per cent tax cost — which offers considerable savings when you consider the 53.5 per cent benefit Ashley received when she made the contribution. Joe can then contribute this money to his TFSA and grow it tax-free for decades.
“To take advantage, couples need to plan ahead — if you contribute and withdraw in the same year it will be taxed back to the higher income spouse. But if you stop contributing three years before starting withdrawals, it is taxed to the lower income spouse,” Dave says.
The same rules apply near retirement. If the lower income spouse plans to retire at age 60 while the higher income spouse continues working, they just need to ensure that spousal contributions end three years prior.
While enhancements to income splitting rules for those over age 65 have made the use of spousal RRSPs less important, they still retain advantages in special use cases like the ones described above.
To discuss investments, life insurance, retirement planning, estate planning, and strategies that could help generate income and minimize taxes, make an appointment with Dave Lee in White Rock. Call 604.535.4743 or email dave.lee@scotiawealth.com, and follow him on Facebook, Twitter and LinkedIn for more financial insights.