We’ve all heard the statistics in Canada. Somewhere around 40 percent of all marriages end in divorce. For those with a little more determination, 60 percent of second marriages end in divorce. You don’t need me on a soap box to tell you.
Divorce is obviously a very sensitive subject, however it is important to know what happens to your RRSP (registered retirement savings account) when you’ve reached irreconcilable differences.
What are the rules?
When it comes to any registered account in Canada, you just know that CRA will have a few rules. There is some positive news for the unfortunate folks who are faced with divorce however. CRA does allow RRSP amounts to be transferred on a tax-deferred basis between spouses based on the separation agreement.
The person that is receiving the RRSP proceeds does not need to have sufficient RRSP contribution room to accommodate the transfer either. The person can exceed their normal contribution limit for a divorce transfer.
Both RRSPs and Spousal RRSP will likely be considered when dividing a couple’s belongings, in addition to their RRIFs, LIFs, TFSAs and non-registered accounts.
When it comes to deciding how much should be transferred, it can be a very complicated procedure. Considering after-tax income is likely to be reviewed when making the calculations. If one partner needs money immediately, then transferring a TFSA may make more sense than transferring the same amount from an RRSP. TFSA withdrawals are not taxed whereas RRSP withdrawals are indeed taxed (as many of you know already).
When the separation is finalized, it is also a very good idea to make sure that you review your will, your beneficiaries and your life insurance policies.
Divorce is a very delicate subject, but it is important to know the rules that will impact your financial plan. The lawyers will do their work but once an agreement has been reached, it will be time to review the new financial reality and make adjustments to the plan.
If you are facing a divorce, I am sending you a hug.
I wish you health and happiness, always.
With Gratitude,
Kevin-Barry Henry.
THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.