At first glance, it would appear that spousal Registered Retirement Savings Plans (RRSPs) are no longer needed because the pension income splitting rules allow couples to split their income anyway once their RRSPs become Registered Retirement Income Funds (RRIFs). Nevertheless, there are a few situations in which spousal RRSPs can offer some advantages.
Income splitting at any age
Under the pension income splitting rules, you must be at least age 65 to split income and you must convert your RRSP into a RRIF. Regular RRSP withdrawals do not qualify for pension income splitting. However, with spousal RRSPs, you can split income anytime that the attribution rules don’t apply. If a spousal contribution hasn’t been made in the current year or the two previous calendar years, any withdrawals from the RRSP will be taxed to your spouse.
Because the attribution rules use calendar years, it is usually best to make spousal contributions within the calendar year, instead of during the first 60 days of the following year. For example, if a spousal contribution is made in February 2012 for the 2011 tax year, the income attribution will cease to apply on January 1, 2015 (provided no further spousal contributions are made). However, if the contribution were to be made before December 31, 2011, the attribution would cease to apply on January 1, 2014.
If you are making contributions regularly, another strategy would be to wait until you have three years’ worth of RRSP room and then make the full contribution all at once and deduct it over the next three years. At the end of the three-year income attribution period, your spouse could make a withdrawal without attribution being applied. The following year, you could make another lump-sum deposit that maximizes all of your unused RRSP room. Because the attribution rules are applied based on when the contribution was made, not deducted, this provides you with a decision window every three years – to withdraw or to contribute. The only downside to this strategy is the lost investment gains because of the delayed contributions.
Not restricted to 50 per cent
After age 65, you can split up to 50 per cent of your RRIF income with your spouse. With spousal RRSPs, you determine the amount of income to split by deciding how much to contribute to the spousal RRSP.
Benefit from having a younger spouse
If you have a younger spouse, you can continue to contribute to the spousal RRSP until the end of the year your spouse turns 71, provided that you still have RRSP room. Also, with a younger spouse, the income from those RRSP contributions can be delayed until the year after your spouse’s 71st birthday.
Take advantage of unused room at death
If you have unused RRSP room at the time of your death and you have a spouse who wasn’t age 71 in the previous year, your executor could reduce the taxes in the estate by making a contribution to a spousal RRSP.
As you can see, there are several reasons to continue to use spousal RRSPs. The disadvantage, of course, is that a spousal contribution becomes the property of your spouse. With pension income splitting, no assets are transferred. You and your spouse just file a joint election each year. This also means that you can choose on a yearly basis whether or not income splitting makes sense.
Crystal Taylor is co-owner of Taylor Financial Solutions and a financial advisor with Manulife Securities Incorporated, a member of the Canadian Investor Protection Fund. Ken Taylor is co-owner of Taylor Financial Solutions and an insurance representative with Manulife Securities Insurance Inc. Taylor Financial Solutions can be reached in Winnipeg at 896-0848, and in Gimli at (204) 642-7594.