Spousal RRSPs still a valuable tax tool, say experts
Parminder Parmar, CTV.ca News
Published Sunday, February 8, 2009 11:29AM EST
In 2007, Ottawa introduced new rules that allow couples over the age of 65 to split some of their income for tax purposes. It's a move that could help lower a senior couple's overall tax payments.
But RRSP experts say the new "income splitting" legislation isn't the only way -- or may not be even the best way -- for married or common-law couples to share and lower their tax burden for maximum benefit during retirement.
Financial advisers say Ottawa's new rules don't necessarily mean that RRSP investors can or should forget about spousal RRSPs, which in past years was one of the only methods of income splitting available in Canada.
Spousal RRSPs give couples the chance to offset a family's overall tax burden by allowing a spouse in a higher tax bracket to contribute to his or her partner's RRSP.
The goal of "income splitting" is to give both spouses or common-law partners approximately equal income during their retirement years.
"The true benefit is the net effect is that the couple will pay less taxes over all. That's the objective (of a spousal RRSP)," Brian Himmelman of Halifax's Himmelman and Associates told CTV.ca.
In the 2007 federal budget, Ottawa introduced a limited form of income splitting for Canadians 65 and over. Under the new rules, pensioners are allowed to split up to 50 per cent of their eligible pension income with a spouse or common-law partner.
But that doesn't mean that spousal RRSPs are obsolete or unnecessary, says Himmelman. Most notably, he says, the new income splitting rules apply only to pensioners, so couples who retire earlier are not eligible until they turn 65.
Himmelman said for anybody who plans an earlier retirement, it's crucial they understand spousal RRSPs and financial planning.
"We still act as if the new rules don't make that big a difference," says the certified financial planner.
Himmelman adds that Ottawa could always change the new income splitting regulations.
"What if the government decides to change the rules in the future? Then the people who used these tools and put themselves in a good income splitting position via spousal RRSPs would still be in a good condition," he says.
There are also other reasons couples may consider spousal RRSPs, says Evgeniya Samartseva, an adviser with Stewart and Kett Financial Advisors in Toronto.
She told CTV.ca that spousal RRSPs also allow couples the opportunity to potentially double their RRSP withdrawal under the homebuyer's plan.
She added that under current regulations, Canadians may not contribute to their RRSP after the age of 71, even if they continue to earn a significant income. A spousal RRSP, she says, would allow those individuals to make contributions to their spouse's or common law partner's plan, if they're younger than 71.
But Samartseva cautioned investors to consider some downsides of spousal RRSPs as well. Most importantly, she says, RRSP investors should be aware that the contributing spouse loses control over the spousal RRSP account because it legally belongs to his or her partner.
Samartseva says it's in an investor's best interest to see a financial adviser if they are considering a spousal RRSP.
Himmelman puts it this way: "The concept (of spousal RRSPs) is quite simple -- you can split income. It's the implementation and execution that can be detailed and quite complicated."