DEDDEDA STEMLER FOR THE GLOBE AND MAIL
Love is divine, but saving money is nifty, too
Putting excess funds into a spouse's retirement plan can reduce taxes for retirees of all ages
Establishing a spousal registered retirement savings plan for his wife Judy a decade ago is one of the smartest financial decisions Philip Bogod says he has made.
Through the spousal RRSP, the Victoria couple have been able to reduce their overall tax burden. Another advantage is that Mr. Bogod, who at 72 continues to work part-time in the health services industry, was able to continue contributing to his younger wife's spousal RRSP even after he turned 69, and converted his RRSP into a registered retirement income fund (RRIF).
Those extra few years of contributions confer "a terrific advantage" in wealth accumulation for retirement, he says.
Under the RRSP program, taxpayers are entitled to contribute 18 per cent of their previous year's earned income to their account (to a maximum of $20,000 in 2008, or $21,000 in 2009). This can be to their own RRSP, to a spousal RRSP, or to a combination of both.
Under the spousal program, the person contributing funds is typically the higher-earning spouse on behalf of the lower-income partner.
This can help a couple to even out income at retirement and thus reduce the family's overall tax burden.
Although Canadians age 65 and older have been able to split as much as 50 per cent of eligible pension income with their spouse or common-law partner since 2007, the spousal RRSP is still advantageous for those who plan to retire before age 65.
With the median retirement age in Canada at about 61, according to Statistics Canada, this remains a significant advantage.
"Let's say someone wants to retire before 65. They can't pension-split with a regular RRSP, because the rules don't apply and they're not considered eligible pension income," explains Jamie Golombek, Toronto-based managing director for tax and estate planning at CIBC Private Wealth Management.
"But if a couple who were both 60 or 61 had a spousal RRSP, they would be able to take advantage of the lower spouse's tax rate before age 65," he says.
A common strategy for couples is to build up the RRSP portfolio of the lower-earning spouse. But this requires a careful projection of income that both spouses can expect at retirement.
If, for example, the lower-income spouse will receive other income later from such sources as non-registered investments, a pension or inheritance, it might be beneficial for the higher-income spouse to maintain a larger RRSP balance.
Otherwise the lower-income partner could be overcompensated to the point where he or she could end up in a higher tax bracket when the funds are withdrawn.
"You'd hate to be in a scenario where you're contributing to a spousal RRSP which works in reverse" of what was intended, Mr. Golombek warns.
Another factor to consider is whether there is an age differential and the older spouse continues to work and earn RRSP-eligible income, as Mr. Bogod has.
After the income-earning spouse turns 71 (and must terminate the RRSP no later than Dec. 31 of that year), he or she is still eligible to contribute to the younger spouse's RRSP and claim the tax deduction, with the lower-earning spouse obtaining and managing the investment proceeds until turning 71.
"We don't often think of 75-year-olds having employment or business income. But many people in their 70s have rental properties and are generating earned income," Mr. Golombek notes.
"And if they have a spouse who's younger, then a spousal RRSP is very, very important."
Another advantage associated with the spousal RRSP is that "quite often in couples, two people have very different investing styles," says Audrey McFarlane, a financial adviser with Edward Jones in Victoria.
A spousal RRSP "allows each of them to invest a portion of the money according to their own personal style," she says.
Mr. Bogod, for example, praises the spousal RRSP for having allowed him and his wife to pursue different investment philosophies for years; he's more aggressive and she is more on the conservative side.
"If two people have very different styles of investing, a couple might end up with a very balanced approach over all," says Loren Francis, a portfolio manager with Cumberland Private Wealth Management Inc. in Toronto.
Experts offer a word of caution, however.
Under Income Tax Act rules, any withdrawals made by the annuitant, or beneficiary, are taxable to the contributor if the contribution was made within a three-year window, consisting of the current or previous two taxation years. An exception is made for the minimum annual withdrawal required by law if the RRSP proceeds were converted into a RRIF.
"You have a kind of three-year waiting period to make sure somebody isn't putting money into a spousal RRSP with the pure goal of having their spouse take it out at a lower tax rate," Ms. McFarlane explains.
Contributors also should be aware that if they combine the proceeds from a spousal RRSP and personal RRSP into a single plan, the latter loses its status.
"Sometimes people say 'Instead of having these two little plans, let's just put them together.' If you put them together, then by default all the funds are considered spousal," says Cynthia Kett, a certified financial planner with Stewart & Kett Financial Advisors Inc. in Toronto.
Another point: While spousal RRSPs are often thought of in terms of benefiting older couples, they might also provide younger people with an advantage.
Under the Home Buyers' Plan program, for example, each person can withdraw as much as $20,000 from his or her RRSP; the presence of a spousal plan doubles to $40,000 the potential down payment for a first home if one spouse is working and the other is not. "This is a very common device for young people, " says Mr. Golombek, who has pursued the strategy himself.
"When we wanted to buy our first home, the only source that we could really draw from in terms of a down payment was using the HBP."
Special to The Globe and Mail