15 Mar Pension income splitting versus spousal RRSP’s
Determining when each tax strategy works best.
Pension income splitting can be a great way to reduce taxes. Couples can split their income once their Registered Retirement Savings Plans (RRSP’s) become Registered Retirement Income Funds (RRIF’s). The rules allow a pensioner to transfer up to half of his or her eligible pension income to a spouse. Sounds great, right!? So why keep that spousal RRSP? Spousal RRSP’s may still offer some advantages, particularly if one spouse earns significantly more income that the other.
Income splitting with a RRIF
Under the pension income splitting rules, you must be at least age 65 and convert your RRSP into a RRIF in order to split income. Regular RRSP withdrawals do not qualify for pension income splitting. For people who retire early, a spousal RRSP provides more flexibility. This is because you choose how much to contribute to the spousal RRSP, which has the potential to equalize retirement income and save taxes.
It’s important to remember that spousal RRSP’s have a three-year rule: if funds are withdrawn from a spousal RRSP within three calendar years of a contribution (the income attribution period), all or part of the income could be taxed to the contributor spouse. 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 2018 for the 2017 tax year, the contributor spouse would be taxed, all or in part, on withdrawals made before January 1, 2021 (provided no further spousal contributions are made). However, if the contributions we made before December 31, 2017, the contributor spouse would be taxed, all or in part, only on withdrawals made before January 1, 2020.
To read the rest of the contribution strategies and a few other important differences between pension income splitting and spousal RRSP’s in this article by Manulife, CLICK HERE.
If you have any questions please be sure to contact Harry Perler or David Olejnik.