The spousal registered retirement savings plan (RRSP) has its share of advantages for splitting a spouse’s income and reducing the couple’s tax bill. But what happens to these savings in the event of separation? Answers with Stéphanie Castonguay, senior advisor, investment and financial planning, at National Bank, and Jimmy Verdule, private manager and financial planner at Desjardins Wealth Management.
What is the spousal RRSP used for?
“The spousal RRSP helps reduce the couple’s overall tax bill by allocating a tax deduction to the spouse who pays the most taxes,” explains Jimmy Verdule. The calculation must be done globally: we must not focus only on the amount of taxes paid this year, because we must also predict the amount that will be paid when the RRSP is disbursed. We must therefore look at who pays the most taxes today, but also who will pay the most taxes when we withdraw the amounts. The spouse who has the largest income today will not necessarily have the largest retirement income. These two calculations must be made in order to verify the real tax savings for the couple. »
Can you use an individual RRSP as a spousal RRSP?
“These are two different things,” explains Stéphanie Castonguay. You cannot use your individual RRSP and name it a spousal RRSP. You must open a specific account, intended to receive the contributions paid by the spouse. »
PHOTO PROVIDED BY THE NATIONAL BANK
Stéphanie Castonguay, senior advisor, investment and financial planning, at the National Bank
“Both people must qualify as spouses, that is, be married or common-law. The person contributing to the spousal RRSP must have unused contribution room. She is the one who receives the tax deduction, and she does not need to have any unused rights for this. As for the person who receives the contribution to his spousal RRSP, he is the holder of the funds. »
Can you contribute to a spousal RRSP after age 71?
“A contributing spouse who has exceeded the age of 71 can continue to contribute to their spouse’s RRSP if they have not reached this age limit,” says Stéphanie Castonguay. This is a rare case where you can continue to contribute to an RRSP after age 71. We see here that the age gap allows the tax impact of investment income to be deferred for longer. »
If things go wrong, can we recover the amounts without tax impact during a separation?
“There will still be a tax impact, but it will be less depending on the rule of three December 31sts. Let me explain: if three December 31sts have passed since the contributions were made, it is the spouse holding the RRSP who will face the tax impact, says Jimmy Verdule. But if we withdraw the funds without waiting until three December 31st have passed, these withdrawals have an effect on the income of the contributing spouse. Please note that you can convert a spousal RRSP into an individual RRSP if you can provide legal proof of separation. Furthermore, we do not have to wait for three December 31sts when we make withdrawals for a home ownership plan. [RAP]. »
What happens to the spousal RRSP when one member of the couple dies?
“For married couples, the spousal RRSP is part of the family patrimony, usually shared 50/50 between the spouses when there is a divorce,” says Stéphanie Castonguay. It is different for de facto spouses, because in the event of separation, each spouse retains their own property acquired during the period of living together. The holder of the spousal RRSP is therefore the owner of the amounts that have been contributed. However, if a cohabitation agreement has been concluded between the de facto spouses, this document may provide for another division of assets in the event of separation. »