Money Do we need spousal RRSPs if our salaries are the same?

00:21  03 august  2017
00:21  03 august  2017 Source:   moneysense.ca

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If you and your spouse have similar salaries , and your wife also has a DBPP, does it still make sense to contribute to spousal RRSPs ? Considering our employment status and how our salary levels don’t differ too much, does it even make sense to have a spousal RRSP ?

Do we need spousal RRSPs if our salaries are the same ? Offsetting RRSP withdrawals. A: Contributing money to our RRSPs has become synonymous with saving for retirement . We defer tax payments while employed in anticipation of paying less tax during retirement .

Q: I have a question about whether my wife and I should consider using a spousal RRSP. I’m 32, self-employed, paying myself an $80,000 annual salary and have a personal RRSP of around $160,000. My wife is also 32 and she’s employed with a company that provides a defined benefit pension. She is making around $70,000 per year and has a personal RRSP of $60,000.

Considering our employment status and how our salary levels don’t differ too much, does it even make sense to have a spousal RRSP? Or should I just assume that pension income splitting will still be around by the time I retire?

—Vince

A: The purpose of a spousal RRSP is to try to keep the taxable income of two spouses similar in retirement. You benefit as a couple if you can equalize your investable assets and ultimately the amount of income received in later years. Based on your situation this income could come from various sources such as Registered Retirement Income Funds (RRIFs), a defined pension plan, Old Age Security, and Canada Pension Plan to name a few.

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Do we need spousal RRSPs if our salaries are the same ? If you and your spouse have similar salaries , and your wife also has a DBPP, does it still make sense to contribute to spousal RRSPs ?

All else being equal (assuming pension income splitting is available), if one spouse has a larger amount of money in an RRSP at retirement they would have to withdraw more money based on the RRIF withdrawal rules. As a result, the higher income earner will pay more income tax than if each spouse had an equal amount of RSPs and similar incomes.

The goal as a couple is to be in a lower tax bracket and pay income tax at the same lower marginal tax rate. I would recommend keeping your RRSP balances fairly close throughout your working years.

At this time I am not sure what your wife’s potential defined benefit pension would be at retirement age. As a result, it is difficult to project what her future income will be and therefore the future tax on income received.

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Spousal RRSPs are introduced so that withdrawals can be taxed in the hands of the lower-earning spouse . If you need to double check, call the CRA at 1-800-267-6999. What is considered ’earned income’? Earned income includes salary , self-employment income, taxable maintenance and alimony

I still get the same tax deduction as before and it still reduces my available RRSP contribution room. So if you don’t touch your RRSP money until you are 65, then it may be true that you don’t really need to worry about spousal RRSPs and can simply rely on income splitting.

I would recommend requesting a pension projection from her employer providing the defined benefit pension amount. Ask them to do a projection showing the taxable pension income at her retirement date. Also, ask if the defined pension income is indexed to inflation and if so at what rate or percentage. This will allow you to understand the amount of potentially taxable income that will be generated from this source at retirement.

I would also suggest getting a projection for both of your RSPs illustrating what you will each accumulate at retirement and also what amount of taxable income will be generated.

A good option would be to have an independent professional advisor create a financial plan and project some scenarios taking into consideration your current investable assets (RSPs), future contributions, growth rates and all future taxable income sources. Regular annual reviews are also recommended.

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Here are the important things for spousal RRSP ’s you need to consider If only one spouse has a large amount of money in an RRSP , at retirement that will mean a high income and pay more income tax than if each spouse has the same amount divided between their RRSPs .

Combine Spousal and Non- Spousal RRSPs . Need an accounting, tax or financial advisor? Look in our Directory. The taxpayer's spouse has contributed ,000 to the same RRSP in the past 3 years.

This will provide more clarity around what amount of taxable income you would each receive at retirement based on where you both are now. Then if there is a large divergence in assets and taxable income at retirement age you can look at course correcting it now. One way would be you contributing to a spousal RSP.

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Dean Kendall is a chartered financial consultant with Truly Comprehensive Financial Services in Calgary

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