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Kevin-Barry Henry

Splitting the Difference: Retirement Planning for Two?

By: Kevin-Barry Henry, #1 Bestselling Author

Could a Spousal RRSP be the answer?

Sharing tasks and chores such as laundry, cooking, cleaning and groceries makes sense for many Canadian households. What then, do we do when we begin to consider income in retirement? Perhaps the list of things that couples share can (and undoubtedly does) include contributions to retirement investments, but should you?

Registered retirement savings plans (RRSPs) are popular among Canadians who are interested in building a future nest egg. Here is some information to explain the basics of RRSPs:

  • Generally used for saving for retirement
  • Contributions are tax-deductible and investments grow tax-free within the plan
  • Both contributions and investment earnings are taxable upon withdrawal
  • Withdrawals are included in income and do affect the eligibility for federal income-tested benefits and tax credits, such as child tax benefits and Old Age Security

Spousal RRSP Basics

A spousal RRSP is an income-splitting strategy that offers tax savings for couples with earning in different tax brackets. The spouse or common-law partner earning the lower income is the owner of a spousal RRSP plan. The partner with the higher earnings makes the contributions to the plan and gets the resulting tax deductions. When a withdrawal is made from the RRSP, it is taxed at a marginal tax rate based on the lower earnings of the plan’s owner, subject to the attribution rules listed below.

The advantage of a spousal RRSP is that it can provide you with opportunities to split income before and after retirement. Tax savings are realized when the spouse in the lower bracket takes income from the plan. The net effect is that the couple will pay less tax overall.

Attribution Rules

Withdrawals from a spousal RRSP will be taxed in the spouse’s hands provided that the contributor has not invested any amount in any spousal plan in the current or preceding two calendar years. If the spouse makes a withdrawal before maturity and the contributor has deposited cash or other assets to any spousal RRSP in the current or preceding two calendar years, the amount withdrawn (up to the deposit amount) will be included in the contributor’s income for that year.

Let’s look at an income splitting example:

Individual RRSP 40% tax rate

Spousal RRSP 20% tax rate

RRSP Income (Withdrawal)

$12,000

$12,000

Taxes Payable

$4,800

$2,400

After-Tax Income

$7,200

$9,600

Tax Savings (Annually)

$2,400

 

It is important to realize that the spouse who opens the RRSP is the legal owner of the plan and can make all investment decisions and withdrawals.

If your vision of retirement includes a partner, you might want to consider splitting more than cooking and cleaning. You might want to look into splitting your income in retirement also. I recommend it.

If you would like to learn more about income splitting, or more tax saving strategies, feel free to book me for a free 15 minute call here: FREE 15 MINUTES WITH KB

With Gratitude,

KB.

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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.

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