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Planning Your Retirement

Spousal RRSPs: Togetherness And Tax-Cutting

One of the best strategies you can use to minimize the total tax you will pay during your retirement is to set up a spousal RRSP now. The idea is simple: if you're married and you earn more than your spouse, you should at least consider contributing to a spousal plan. This could help you equalize your retirement incomes later so that your combined tax bill in retirement will be lower than if one of you had to pay tax at the top rate.

What's it worth to you?

Unhappiness is having your retirement income taxed at the highest rate which could be as much as 54%, depending on where you live. By arranging to have both incomes taxed at a lower rate, you could end up with thousands of dollars more in disposable income. As well, if your net income exceeds $53,215, part or all of your old age security pension benefits could be taxed back by a mechanism referred to as "clawback".

Get that tax credit.

If your spouse has no other income, there is an additional benefit to using a spousal RRSP to create a retirement income. With both spouses having retirement income, each is eligible for the federal pension tax credit, which is worth as much as $1,000 annually

Ah, youth: an extra edge for spousal plans.

There's an added bonus to a spousal plan if your spouse is younger than you. The money you contribute to the spousal plan will have that much longer to increase in value. And you may be able to contribute to the spousal plan even after you reach age 69 and have to convert your own RRSP.

A spouse is a spouse, when...?

Spousal RRSPs work whether or not you are officially married. If you have lived together for at least a year, or if you have children, common-law relationships are recognized for the purpose of spousal RRSPs.

There's a limit: what you can't do.

You can't take your money back. Once you've put money into your spouse's plan, that money belongs to your spouse. You get the tax deduction. You can't put money into a spousal plan, get the tax deduction, then have your spouse withdraw the money right away. Otherwise, you'll be taxed in full on the money withdrawn. You have to wait at least three taxation years after your last contribution to a spousal plan before the tax bill or withdrawals pass to your spouse.

Contributing to a spousal plan doesn't raise your contribution limit. Your limit is the same whether you put the money into a spousal plan, your own RRSP, or both. However, your spouse's contribution limit is not affected by your contribution to a spousal plan.