What is the best gift to give your loved one with Valentine’s Day and the RRSP deadline coming in the same month? Nothing says romance better than the spousal RRSP. It’s about you saying to your lower income (but better) half, “I want our collective taxes to be lower in retirement”. Music to anyone’s ears.
In all honesty, there are few income-splitting opportunities available between two married (or common-law) couples. The TFSA is actually a great one (where one spouse can gift money to their other half without ‘income attribution’ dinging them for the investment income), and ownership of the principal residence is another. But the spousal RRSP continues to be the most popular of income-splitting techniques between spouses.
The concept is relatively simple. Instead of contributing to his/her own RRSP, the higher- income earner contributes money into a spousal plan. The tax deduction is still attributed to the higher-income earner (for the nice refund), but the eventual income from the tax-deferred growth will be attributed to the lower-income spouse. And when it comes to retirement income, you need to think about evening out income between spouses, because nothing eats up money faster than one spouse being taxed at a much higher rate than the other in retirement.
If a couple has $80,000 in taxable retirement income, here is the difference in after-tax income depending on who claims that income:
One earner of $80,000 in Ontario: taxed at $20,476 = $59,524 left after taxes
Two earners of $40,000 each in Ontario: taxed at $7,972 each = $64,056 left after taxes
An annual difference of $5,532 is a lot of money and it is easily avoidable with a little tax planning.
Pension income-splitting is also a great gift from the government, allowing a 50% split of retirement income between spouses. But remember, this is just a 50% split. The spousal RRSP actually allows 100% attribution to the lower income spouse.
Using a spousal RRSP can also limit Old Age Security (OAS) claw-backs. If income exceeds $73,756 in retirement a tax-payer will face a shrinking OAS benefit, but splitting income by equalizing RRSPs or RRIFs can help avoid these claw-backs.
Keep in mind that contributions to spousal RRSPs cannot be withdrawn for at least three calendar years. If money is withdrawn, there is a three year attribution rule to prevent a high-income spouse from contributing to the lower-income spouse’s RRSP and benefiting from the refund.
A final reminder: The 2018 contribution limit for everyone is 18 per cent of income to a maximum of $26,230, but unused contributions can be accumulated and used in future years.
What will you give your sweetheart in the lead-up to deadline day this year? My suggestion: a spousal RRSP under the pillow. You’ll both sleep better.