Why Spousal RRSPs Still Make Sense

The introduction of pension sharing has given retirees a valuable option to reduce tax.  Up to half of eligible retirement income, like pension plan benefits and RRIF payments, can now be transferred to a spouse or partner annually for tax purposes.  Splitting income through pension sharing can also help high-income spouses preserve their government benefits by avoiding traps like the Old Age Security clawback.   

Traditionally the spousal RRSP has been a popular vehicle used by couples in different tax brackets to better equalize future retirement income and minimize tax. How? With a spousal RRSP a higher-earning spouse makes tax-deductible contributions to an RRSP that builds retirement savings for their partner. Those savings are eventually withdrawn as income by the partner and taxed at their lower marginal rate.

Has pension sharing made the spousal RRSP obsolete? The truth is there’s often room for both strategies. Here are three situations where having a spousal RRSP still makes sense.

1. Retiring early

 If you’re under age 65, only income from a registered pension plan, (a defined benefit plan or defined contribution plan) can generally be divided for tax purposes. So if you’re among the two-thirds of Canadians without a formal pension plan and want to retire early, where can you find income to share? A spousal RRSP is a possible solution. You can withdraw – and split – income when needed.

2. Earning income in later life

Spousal RRSPs can boost your household retirement savings if you’re still earning an income into your seventies. While you cannot hold an RRSP in your own name after age 71, under certain conditions you can still contribute to a spousal RRSP for a younger partner and continue to tax-shelter income from employment, property rental or other qualifying source.

3. Sharing extra pension income

Want to allocate more than 50% of your pension income to your spouse? Under the pension sharing rules it can’t be done, meaning you could miss out on further tax savings. A spousal RRSP doesn’t face this restriction, making it possible to share additional retirement income as needed.

If you’re interested in getting more out of your retirement income, talk any of your friendly representatives at Weyburn Credit Union. We’ll explain how pension sharing and spousal RRSPs can work for you.