How income splitting affects HBP repayments

Q: I am 38 years old with $98,000 in my RRSP and I will have a defined benefit pension when I retire from my current employment. My current annual income is approximately $90,000.

My wife is 33 years old with $20,000 in her RRSP and is self-employed, therefore she has no pension plan other than her own savings. Her current annual income is approximately $35,000.

We are currently both contributing $100 monthly to our respective RRSP but I am thinking to move both contributions to a spousal RRSP in my wife’s name in order to maximize income splitting when we retire.

Does this look like a good strategy and how would this affect required Home Buyer’s Plan repayments? I have a minimum repayment of $686 and my wife’s is $310.

—Simon

A: Retirement planning is an important exercise, whether you’re in your 70s or your 30s. There are different strategies to employ depending on your age and at your age, Simon, the keys are how much to save and where to save it. Setting targets early can help you determine how much you can spend on other things like a home, travel and double-doubles.

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It sounds to me like you guys have been diligent RRSP savers. Over time, your defined benefit (DB) pension enrollment may soak up most of your new RRSP room each year, so your RRSP savings may be limited eventually, if not already. A pension adjustment (PA) is a reduction in your annual RRSP room to account for pension plan participation so that someone in a pension doesn’t earn more tax-deferred retirement income than someone who has only an RRSP.

Offsetting RRSP withdrawals

If we start with your pension, you should note that it will be eligible pension income for pension income splitting in retirement. You will be able to split 50% of your pension with your wife, moving it to her tax return on your future tax filings. Income splitting for a DB pension is allowed after the age of 55.

With your RRSP, you can split RRIF withdrawals, but not until age 65. If you guys can retire early, which isn’t unreasonable with your defined benefit pension participation and your head start on savings, you may want to aim to have roughly equal RRSP balances heading into retirement.

Spousal RRSP contributions are a way to do so. But the way a spousal RRSP works is important to consider. You could make contributions to a spousal RRSP account in your wife’s name, Simon. You would claim the deductions based on your available RRSP room and your wife would eventually take the withdrawals and be taxed on them.

Are RRSPs ever a waste of time?

Until 2007, spousal RRSPs were “the” retirement income splitting tool. Ten years ago, the Conservatives introduced pension income splitting to make it easier. It was the same year they levelled the income trust industry by introducing punitive tax rules, so pension income splitting was a bit of a condolence for seniors, many of whom were heavy into income trusts.

Of note is that the CRA states: “You cannot designate contributions that you make to your spouse’s or common-law partner’s RRSP(s) or SPP (or that he or she makes to your RRSP(s)” as Home Buyer’s Plan repayments.

This means your wife will need to make contributions to her personal RRSP to avoid having her required repayment of $310 included in her income each year until the full repayment has been made. Your spousal RRSP contributions won’t count as repayments of either of your HBP balances. So likewise, you will need to make at minimum $686 of contributions to your personal RRSP to count towards your required repayment. But your excess contributions, Simon, could and should be made to a spousal RRSP for your wife.

How to know a spousal RRSP is right for you

You may retire at 65, after which point your RRIF withdrawals can be split 50/50 anyway. But in case you retire earlier, or in case the pension income splitting rules change in the future, it’s a good idea to contribute to a spousal RRSP for your contributions after first taking care of your required Home Buyer’s Plan repayment each year, Simon.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.