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Are spousal RRSPs still useful?

Spousal RRSPs have traditionally been used as an income-splitting strategy in retirement.  You can contribute to your spouse’s RRSP but claim the tax deduction yourself. Your total contributions (to your own and your spouse’s plans) are subject to your own RRSP contribution limits. In retirement, withdrawals are taxed in your spouse’s hands rather than yours, as long as the contribution has remained in the plan for at least three years. So you benefit from their lower tax rate in retirement, while reducing your own tax liability during your working years. But, in October 2007, the government introduced new pension splitting rules that allow Canadians to split pension income with their spouse. Here are situations where the spousal RRSP is still useful: • If you are planning to retire before age 65 and don’t have a registered pension plan; spousal RRSPs allow income-splitting before age 65 whereas pension income-splitting normally begins at age 65 • If you are saving for a home (each person can withdraw $25,000 under the Home Buyers’ Plan) • If you’re 71 or older and can no longer contribute to your own RRSP, you can still contribute to your spouse’s RRSP if you have earned income and your spouse is younger than 71 • If you and your spouse want to make the balance of assets in your household more equal.

Give Yourself a Raise!

Many Canadians are pleased to receive a tax refund each spring, but what if you had that money to spend each month when you really needed it and were able to contribute more to your RRSP contribution at the same time? Your employer is obligated to withhold income tax from your gross salary but you may be giving the government a free annual loan. The withholding amount may be reduced depending on the deductions and tax credits available to you. Your employer may be able to take into account your current RRSP contributions when determining your income tax withholdings if the employer makes the contributions on your behalf or with the permission of the Canada Revenue Agency (by filing a T1213). Your income tax withholdings could be reduced and your take home pay could be increased by having your employer factor in regular RRSP contributions.  For more information on this and other tax planning questions, please contact us.