Now that you can split pension income in retirement, is it worth it to contribute to a Spousal RRSP?
Income splitting is a tax planning technique designed to shift income from a higher earning spouse to the spouse with little or no income. It can reduce or eliminate potential clawbacks (e.g. OAS, age credit).
Current pension income splitting rules have somewhat diminished the need to use a Spousal RRSP to achieve a tax benefit. But even though this strategy is less popular than it used to be, Spousal RRSPs can still be useful in certain circumstances.
Pension income splitting allows you to transfer up to 50% of eligible pension income. Eligible pension income is restricted to payments from a Registered Pension Plan, RRIF, LIF, LRIF, and lifetime annuity in a registered plan at age 65 and up. If you are under 65, only payments from a Registered Pension Plan will qualify.
The best way to use a Spousal RRSP is when one spouse has a considerably higher income than the other, or has other sources of investment income that won’t qualify for pension splitting.
There are benefits to opening a Spousal RRSP:
- You can contribute to a Spousal RRSP (and take the tax deduction) until the end of the year that your spouse turns 71 – even if you are older than 71 – if you have the contribution room. This is a plus for couples with a large age difference between them.
- It can provide more flexibility for people who want to retire early.
- Spousal RRSPs can be useful for couples planning to purchase a home under the Home Buyer’s Plan. Both spouses could each withdraw up to the maximum of $25,000.
The maximum contribution allowed to a Spousal RRSP is based on the contribution limit of the contributor.
The Three-year Attribution Rule
The “rule of attribution” is a restriction on the owner of a Spousal RRSP making a withdrawal. If the withdrawal is made after the calendar year of the last contribution plus the following two years, it will be considered the owners for tax purposes. Otherwise, it is attributed to the contributor.
If you are nearing retirement, or some other period where the receiving spouse has little or no income, consider making the contribution in December instead of January or February.
An exception to the attribution rule is when the Spousal RRSP is converted to a Spousal RRIF. The owner can withdraw (and pay tax on) the minimum required amount.