High-net-worth wealth planning leader busts myths, unpacks potential use cases for the retirement-savings tool
For most married couples in Canada, the raison d’etre for setting up a spousal RRSP was effectively erased years ago as the federal government introduced new rules around how they could split pension income. But in some specific instances, spousal RRSPs can still unlock interesting possibilities.
“Because of some federal rule changes several years ago, couples can now split pension income after the age of 65,” Calvin Greefhorst, vice president & regional director, High-Net-Worth Wealth Planning at BMO Private Wealth, told Wealth Professional.
“A lot of the rationale for using spousal RRSPs was to enable married couples to split income in their retirement years, so they don’t come up in client conversations nearly as often as they used to.”
According to Greefhorst, there's a few scenarios where spousal RRSPs still make sense. While Canadian couples are allowed to share up to 50% of their retirement income from eligible sources – including RRIFs, pensions, and annuities – those pension income splitting rules don’t kick in until after the age of 65.
A CIBC poll conducted in February found Canadians on average want to retire at age 61, though more than half were doubtful they’re financially able to reach that goal. For the high-net-worth clients that he and his team work with, Greefhorst says early retirement is often feasible and desired, which means they can still benefit from spousal RRSPs.
“For those that are retiring early, we often talk about accessing their RRSP assets and making the switch to RRIFs in the years before age 65, so that they can defer drawing down from other assets like CPP,” he says. “By funding the first part of their retirement more using their own assets, they can potentially get larger payments later on in their lives.”
When having the spousal RRSP talk with couple clients, Greefhorst says the most common misconception is around ownership of the retirement assets. Usually, the person contributing to their partner’s spousal RRSP might believe the money they put in still belongs to them, when in fact it will end up belonging to their partner.
“There’s a three-year attribution rule; generally the deposits have to be in the spousal RRSP for three years in order to avoid withdrawals being taxed in the hands of the contributor. This rule discourages the short-term use of spousal RRSPs to split income. That’s something a lot of clients overlook,” he says.
“Once a client couple understands how ownership and attribution rules work, they typically move forward with their decision. But for some couples, that can be a stumbling block, and they look at different strategies instead.”
Another situation where it makes sense to explore spousal RRSPs, Greefhorst says, is when there’s an age gap between the two spouses.
Learn the types of RRSPs in this article.
“If you have a spouse who’s over the age of 71, they typically can’t contribute to RRSPs anymore because they’re required to convert their RRSP to a RRIF,” he explains. “But if their spouse is younger than them by several years, they can contribute to a spousal RRSP in their partner’s name as long as there’s still contribution room, which is what happens in many cases.”
Spousal RRSPs can also be effective when one spouse has very little to no income. In those cases, Greefhorst says, a spousal RRSP can be set up in the lower-income spouse’s name. Not only can that help equalize the couple’s income during retirement, but it can also open extra opportunities to access beneficial programs like the Lifelong Learning Plan or the Home Buyers’ Plan.
“You tend to see those types of situations among younger clients, where they want to build up assets for the lower-earning spouse,” Greefhorst says. “If you’re a first-time home purchaser, being able to use that RRSP for the Home Buyers’ Plan down the road is pretty valuable.”
Learn how a first-time home buyer can use the RRSP in this article.
Because spousal RRSPs are a long-term planning tool, he encourages married clients to ask about them during annual planning reviews. Advisors, he adds, could potentially create additional impact for their couple clients by bringing them up in conversation.
“I’d say the sooner you can talk about spousal RRSPs, the better. As an advisor, you need to think about where the clients are in their life. But there’s going to be changes in their life too,” Greefhorst says. “Anytime you’re reviewing a strategy, it’s appropriate to understand where spousal RRSPs fit in or don’t fit in.”
