“Ditching the Spousal RRSP” is a post by Adina J, in which she explains why she’s already decided to break one of her New Year’s Resolutions.
We are about two weeks into the new year, and I have already decided to break one of my resolutions. But, but, but… it was a well-considered decision (with input from TiFi readers, no less), so hear me out. My husband and I have decided to ditch the spousal RRSP idea.
Before I get into the reasons, here’s a high-level summary of what the spousal RRSP is all about. It’s an income-splitting vehicle for couples whose respective incomes are significantly different (or single-income couples). A spousal RRSP allows the higher-earning partner to make RRSP contributions in the name of the lower-earning partner. The higher-income partner still benefits from the associated tax deduction. The lower-income partner’s eventual withdrawals will be taxed at their (presumably) lower marginal rate.
Contributions to a spousal RRSP count toward the contributing partner’s RRSP deduction limit; for 2012, the maximum RRSP deduction limit is 18% of your income or $22,970, whichever is lower (plus any unused RRSP contributions carried forward from the years 1991-2011). The total of any personal RRSP contributions and spousal RRSP contributions cannot exceed your RRSP deduction limit in any given year, or else you’ll be subject to penalties. (Editor Joe’s Note: I’d be interested to know whether your $2000 lifetime over-contribution limit applies to spousal RRSPs, too.)
Since retired Canadian couples can now split pension income (including withdrawals from RRIFs) you might think the spousal RRSP should be retired. Not so. It creates useful tax-minimization strategies:
- Withdrawals from a spousal RRSP can be made at any time, even before the annuitant turns 65 – hence, a spousal RRSP creates the possibility of income-splitting long before retirement. There is, however, a significant catch. Withdrawals cannot be made within 3 calendar years of the last contribution, as in that case the withdrawal is treated as income of the contributing (higher-earning) partner rather than the beneficiary, and taxed at the higher rate.
- A first time home buyer can withdraw up to $25,000 from her RRSP, provided the money is in the account for at least 90 days, using the Home Buyer’s Plan. If a couple is buying a home for the first time, each of them can withdraw up to $25,000 from their respective RRSPs — even if one spouse is taking it from a spousal RRSP.
- You can’t contribute to your own RRSP after the end of the calendar year in which you turn 71. A retired person who is much older than his spouse can contribute to a spousal RRSP, which has the same age limit. If the retired person still has a good deal of otherwise RRSP-eligible income, such contributions can result in massive tax savings.
Initially, I was drawn to the idea of setting up a spousal RRSP because I thought it would allow my husband and I to equally fund our respective retirement funds, but still benefit from tax deductions available to me, as the higher-earning partner. The notion of equality was an important one mostly from a psychological perspective; we are a “joint finances” family, and we actively work to make sure that they remain on a truly equal footing, despite the disparity in our incomes. Considering how closely money and power are intertwined in the collective subconscious, this can quickly become an exercise fraught with pitfalls in the context of a relationship (and that’s even when you don’t listen to idiots like this one). We’ve managed to dodge the pitfalls so far, and I figured that a spousal RRSP would be a good tool to add to our arsenal.
When I originally brought up the idea back in December, some TiFi readers raised a couple of valid points that made me reconsider our strategy:
- The government now allows for pension income to be split between partners, which includes RRIF income (provided that you’re at least 65 years old). (Withdrawals from an RRSP, by the way, are not eligible.)
- We don’t plan on withdrawing from our RRSPs before we turn 65 and we already own a house, thus rendering moot the benefits of a spousal RRSP.
True, the “equality” argument would still be valid — but is it worth the extra hassle of setting up a fourth (!) RRSP for our household? After a candid discussion, my husband and I agreed that it was not worth it. The consensus was that having the bulk of our retirement savings under my own name would likely not awaken any tyrannical tendencies in my nature, or otherwise upset the balance of our “joint finances” enterprise. We will continue to make joint decisions regarding our overall contribution to retirement savings, our investment vehicles and strategies, plus everything else related to the topic — just as we do about every other aspect of our financial life. On paper, I may end up looking like the more prosperous spouse, and that’s okay. We’re getting too old to care about appearances anymore.
So, going forward, the plan (dare I call it a resolution?) is to save the same overall amount for retirement ($2,000 per month*) but focus on maxing out my RRSP deduction limit first, and then help my husband maximize his own RRSP. In practical terms, we are looking at something like a $1,500/$500 split. We will most likely augment my husband’s side of the balance sheet by topping up his TFSA, which has about $20K worth of contribution room. So, while I feel a bit sheepish about having to (already!) break one of my resolutions, I think my logical plan justifies it.
*I actually contribute an additional $175/month into an employer-sponsored RRSP, an amount which is then matched by my ermployer. Before you ask, $175 is the maximum amount I can get matched. Since the RRSP options offered in the plan are limited (forget ETFs!), there is little point for me to invest more.