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All in the Family: Spousal RRSPs
Everyone wants to pay less tax. With many couples, one partner, generally the one with the higher income, invests more money into a retirement plan, such as an RRSP, to defer taxes and build a retirement nest egg. At retirement, this could consequently put this partner in a higher tax bracket while their partner ends up with little or no retirement savings and income.
A Spousal RRSP is one tax-smart strategy that many couples can use to equalize their income so they both pay less tax on their retirement income.
Here’s how a Spousal RRSP works. The higher income partner applies some of their RRSP contributions to the lower-income partner’s RRSP and claims the tax deduction on the contributions. When the lower-income partner, who is the legal owner of the plan, withdraws that money (as long as it’s three years since the last contribution was made to the spousal account), the money qualifies as income for the lower-income partner and will be taxed at a lower rate.
Any RRSP contribution you make can go into an RRSP in your name, your spouse’s name, or be split in any way between the two plans. As a retirement planning strategy, contributing to the partner’s plan who has a lower income in retirement is a smart way to reduce the combined tax bite during retirement years, while allowing the higher income partner to claim the contribution deduction thereby reducing tax paid.
Consider a retired couple where one partner has retirement income of $50,000 and the other has $10,000 (for a total of $60,000). Their total tax bill will be $20,600 (assuming a 26% tax rate on the $10,000 and 36% on the $50,000). However, if the partners split their income, so they each have $30,000 in retirement income, and are now both in the lower tax bracket, their combined tax bill will be $15,600 (assuming a 26% tax rate). That’s a family tax savings of $5,000!
Here’s another benefit. A Spousal RRSP could also help you at retirement to reduce the clawback of your Old Age Security (OAS) benefits. For the 2008 tax year, the “clawback” is 15% of net income in excess of $64,718, and 100% if net income reaches $101,118 (per individual, not family). By splitting retirement income, the net income for each person will be less, thus reducing the chance of a “clawback” of government benefits.
To be eligible for spousal contributions, the spouse must be legally married to the contributor or have a common-law relationship as defined under the Income Tax Act. The process of setting up a Spousal RRSP is similar to setting up a regular RRSP – it’s simply a matter of naming your partner as the holder of the plan.
As with any good tax planning strategy, there’s a natural tendency for the federal government to want to tinker with it, and Spousal RRSPs are no exception. So take a close look at your combined retirement income or future retirement income today, and set up a Spousal RRSP while you still can.
Call us today and make an appointment to find out how to take advantage of this tax-smart strategy.
 This article is courtesy of Credential Financial Strategies Inc. your credit union’s partner in providing you with wealth management services.
Credential Financial Strategies Inc. is a member company under Credential Financial Inc., offering financial planning, life insurance and investments to members of credit unions and their communities. Please read the prospectus before investing. Unless otherwise stated, segregated funds and other securities are not insured nor guaranteed, their values change frequently and past performance may not be repeated. The information contained in this newsletter is provided as a general source of information and should not be considered personal tax advice, investment advice or solicitation. ®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.
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