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As married and common-law clients top up their registered retirement savings plan (RRSP) contributions before the Feb. 29 deadline and plan their RRSP contributions for the remainder of 2024, they have the option to contribute to a spousal RRSP instead of their own. But the strategy comes with risks, advisors say.
For 2024, spousal RRSP contribution room, like all RRSPs, have gone up to $31,560. With a spousal RRSP, the contributing spouse gets the tax deduction and the receiving spouse is taxed on withdrawals – with exceptions based on the attribution rules.
Kelly Kotello, vice president and financial planning specialist at RBC Wealth Management in Foothills County, Alta., says spousal RRSPs are most useful when there’s an “imbalance” between spouses in income, assets or age.
“It’s an enhanced income-splitting opportunity, giving you the control to balance out assets and income over time – taking advantage of tax breaks when there’s a high-income year [and] allowing better access to pension [income] splitting … whether that means actually splitting across [spouses] or reporting all the income in the lower-income spouse’s name,” she says.
Ms. Kostello points out that spousal RRSPs are especially beneficial when one spouse isn’t working and building assets of their own, and the other spouse is focused on growing a non-registered portfolio that won’t be eligible for pension income splitting. Meanwhile, a large age gap between spouses can extend the tax deferral period to the end of the year when the younger spouse reaches age 71.
She adds that spousal RRSP contributions generally provide the biggest tax savings during the contributor’s highest-earning years and the year the contributor turns 71, when they can maximize their contribution to a younger partner’s spousal RRSP.
“Someone [in Ontario] making more than $250,000 a year who contributes to a spousal RRSP could see up to 53 cents on the dollar they could get back for every dollar they contribute … in the form of a refund or reduction of taxes owing,” notes Jacqueline Ozdemir, a financial advisor with Ferguson Financial Planning at Assante Capital Management Ltd. in Mississauga. “Had the lower-income-earning spouse made the contribution … they might get back only 20 cents on the dollar.”
More than tax savings
Ms. Ozdemir says a major drawback to pension income splitting is it restricts when you can start splitting income and how much you can split. Spousal RRSPs add flexibility to retirement income planning and can be calibrated to help protect Old Age Security from clawbacks. They also provide a safeguard against the possibility tax rules will change in the future to reduce or remove pension income splitting.
Furthermore, Ms. Ozdemir sees an additional benefit that comes from sharing the wealth and giving the lower-income spouse control over some of the couple’s investment assets.
“This provides a lot of financial empowerment to the spouse who may be contributing to the household in ways that don’t necessarily have a high immediate monetary impact through the form of a paycheque, but are equally important because they let the other spouse go into the workforce and collect the paycheque.”
She says spousal RRSPs are an opportunity for advisors to build out multiple investment strategies for their clients, including at least one account tailored to the risk tolerance and return objectives of the lower-income spouse. That, in turn, can help advisors foster strong relationships with both partners in a relationship.
Watch out for pitfalls
Ms. Ozdemir points out two potential challenges when implementing strategies around spousal RRSPs: the attribution rules (avoid spousal RRSP withdrawals in the year of a contribution or the following two years, otherwise they will be taxed in the contributor’s hands); and contribution limits (a spousal RRSP contribution reduces the contributor’s contribution room).
She’s also careful to inform clients that the contributor relinquishes control over funds contributed to a spousal RRSP and that the spouse can name and change the beneficiary at any time. That can be a significant issue if the relationship breaks down.
A further risk is that spousal RRSP strategies rely on accurate projections of each spouse’s income in retirement – but visions of retirement are in flux.
Julie Petrera, senior strategist for client needs in Canada at Edward Jones in Toronto, cites 2023 Edward Jones/Age Wave research that found for 60 per cent of Canadians – a mix of pre-retirees and retirees – an ideal retirement includes full-time work, part-time work or cycling between work and leisure. Any paid work in retirement could affect spousal RRSP planning, she stresses.
In addition, Ms. Petrera emphasizes that it’s important for advisors to keep in mind that spousal RRSPs aren’t a “set it and forget it” strategy.
As a couple’s circumstances shift – for example, if one spouse’s income increases or there’s a job change that results in one spouse having a new pension or losing a pension – keep asking whether it makes sense to continue to contribute, stop contributing, or even flip contributions back to the spouse who was contributing originally. Perhaps the optimal move is for the higher-income spouse to split their contribution between their spouse’s RRSP and their own or contribute to their spouse’s RRSP in some years and their own RRSP in others.
“It’s important to review this strategy and how it fits into the overall retirement plan at least annually or as [client] circumstances change,” Ms. Petrera says.
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