“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. |
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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.
The RRSP limit in 2011 was $22,450 and for 2012 it’s $22,970.
Fixed. Thanks Jacq!
I think you made the right choice. After I catch up on my unused contribution room and I max out my $3k annual limit (after Pension Adjustment) I can foresee a scenario where a spousal RRSP makes sense for us. But we’re not even close to the point where we’re maxing out all our available TFSA/RRSP room.
I might revisit this in my late 40′s, early 50′s.
Second Robb’s comment. (See, Kathy? I’m keeping non-factual commentary out of the post). It’s obviously irrelevant to your retirement. Until one of you is planning to take unpaid leave it’s not worth it (although if you are planning on it and haven’t disclosed that then, yes, start doing a spousal RRSP now and enjoy some tax-free $$ in a few years)
LOL! No, no plans for that. Although I think it’s certainly a great option for people who plan on having kids down the road, and don’t have the benefit of employer top-up, etc. during maternity leave. It can make a huge difference.
HBP is now $25000, I’m not sure when it was increased, many sites still say $20k.
Do company matching plans usually also do so for spousal RRSPs?
And fixed, thanks. Running all these incorrect facts — you’d think we were a newspaper! lol
Joe, I think both spouses can kick in $25k for HBP, Not the $20 each above.
Adina, thanks for the article, I knew about pension splitting, and that it didn’t apply to RRSPs, but didn’t realize that it was applicable to RRIF’s. I was previously wondering how I was going to try to keep both my spouse and my RRSP plan values realatively close in value to minimize the tax
Glad you liked it! I also didn’t know until recently that pension splitting now covers RIFs – thanks to Robb for pointing that out on my last post!
What’s with the “Penelope Trunk” dis embeded in your post?
There are 200 comments on that particular post there. She get’s traffic that’s for sure. I don’t get it, but obviously she has followers….
I dissed her post because it was, frankly, idiotic and insulting to women who actually have, you know, career ambitions. Of relevance to my discussion was her assertion that ALL women who make more money than their husbands resent their husbands for it, and that this is a “primal” reaction. [By the way, her solution: don't make more money than your husband. Face palm.]
I don’t agree with Ms. Trunk’s proposition, but I do recognize that money can be a focus of, shall we say, power struggles within a relationship. Hence why it’s important to me to keep things on an equal (and democratic) footing in my household.
I had never heard of her before i clicked from your link…
I read some of the comments there. I think most of it was drivel. But i have to say I have personally seen some women resent or don’t fully respect their husbands when they have been the breadwinners in the family. I think you could say it was one of several “issues” that cumulated into the failure of some of marriages. I’ll partially agree with that comment because I saw it happen with a co-worker.
I think it also of course depends on the person’s overall personality as well. There had also been some survey’s where in the situation that the woman was the main breadwinner, they had a higher percentage of “finding” a relationship outside of the marriage if you know what I mean.
I’m not sure if I missed it somewhere, apologies if I did, but do you mention that this part:
“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).”
should also include
“(minus any Pension Adjustment (PA) for that year)?”
For some people with defined benefit or defined contribution pension plans through their job, the PA can be large. After the PA, for example, one of my relatives can only contribute about $4400 per year to an RRSP even though they start with the maximum of $22970 before the PA is applied. They have to be careful not to over contribute as there is a nasty penalty for that.
Your decision to skip the spousal and top up the TFSA sounds like a good one.
Cheers.
Yes, welcome to my world. A “Defined Benefit” pension sounds perfect. It’s excellent, but not perfect. I can only contribute very little to my RRSP and while my contributions are matched dollar-for-dollar, this is not as remarkable as a lot of public sector pensions. I’m not being envious or complaining about somebody else’s pension or what-have-you, I’m just saying “the grass is always greener”.
Even still, it’s certainly better than a Defined Contribution pension where you get rooked by the same PA (as far as I’m aware), but don’t enjoy the same gold-plated guaranteed income as a DB pension.
But clearly Adina hasn’t gone into every single minutiae — what about a PSPA? I got hit with that when I got a permanent position and bought back my service (although it was all at cost not actuarial value which was amazing, it still impacted my RRSP room quite adversely). Also you need to add in any PAR. The key thing is this: don’t contribute more than your Notice of Assessment says (or, ugh, the most recent Notice of Reassessment if we’re being that detailed lol)
Very true! And yes, defined contribution plans (which unfortunately is what the only person who has any pension around here has) can be landmines. The plan can severely restrict what you can invest in but also have a huge PA.
One very large Cdn corporation I know has only two choices for fixed income in its defined contribution pension plan: a money market fund and a medium-to-long term (7-9 year) bond fund. Considering it has hundreds of employees with 1-4 years of retirement, this is bizarre. Every pundit out there says that bonds could plummet as rates start to rise, and that if you must be in bonds, go short-short-short. (e.g. average 1-3 year term) So this plan is essentially making its older members take terrible risks with their lifetime of pension savings. It frazzles me just thinking about it.
Anyway, I still think AdinaJ’s on the right track by skipping the spousal at this point. And I think she’s even smarter to realize that you should only stick to a resolution if it’s helping you. Good article!
My wife and I made a different choice. I sympathise with the problem of having multiple RRSP accounts. Between us, my wife and I actually have 5 RRSP accounts (including her spousal account, a regular RRSP account each, and a locked-in account each). The benefit of income-balancing in the decade before we turn 65 definitely outweighs the hassle of yet another account for us. Your mileage may vary.
You have forgotten one easy strategy using the SRSP. The higher earning spouse can cycle the money into the SRSP and then pull it out 3 years later, then re-invest it in the SRSP again – so long as there’s room, of course. This results in a guaranteed return due to the difference in marginal tax rates between the spouses. Finding ways to use tax deductions are even more reliable than investing in the market.
Great point. Garth Turner is a huge advocate of that strategy. The only issue, of course, is that you lose contribution room after withdrawals so — for somebody like Adina who only has RRSP and TFSA options for retirement and she maxes out each — getting a nice tax return today and tax-free income in 3 years may not be the most prudent way to save. Of course, if a couple used this strategy and then the lower income spouse invested the funds in stocks that produce low-tax dividends… well, you may have a winning combination that supports retirement rather than just lowering one spouse’s tax bill and getting the cash back in a few years.