What do to with a spousal RRSP at age 71

Your wife’s spousal RRSP is hers. While you received the income deductions for making contributions to the plan, she owns it and will generally be required to claim the spousal RRSP withdrawals as income.

What to do with a spousal RRSP at age 71

By the end of the year you turn 71, an RRSP annuitant is no longer allowed to own RRSPs—personal or otherwise, including spousal. That means your wife will have to decide what she wants to do with it. She has three options:

• Convert it to a spousal registered retirement income fund (RRIF)
• Purchase an eligible annuity
• Withdraw the funds in cash or in-kind

With an eligible annuity, you exchange a lump sum amount for a guaranteed stream of income for life. This can be a compelling strategy for the right individual, though in my experience, the psychological challenge of converting a balance sheet item into a cash flow item prevents most Canadians from pursuing it.

Withdrawing the RRSP in cash is rarely the optimal choice, except for very specific circumstances and when the RRSP balance is relatively small. Since the full value of the RRSP withdrawal is taxed in the year it is received, it’s not often the right strategy.

Most Canadians choose to convert a spousal RRSP to a spousal RRIF. If your wife decides to go this route, she must make a minimum annual withdrawal based on her age–much like when you converted your personal RRSP into an RRIF.

That withdrawal must begin the calendar year after the spousal RRSP is converted to a spousal RRIF, at which point the minimum withdrawal is 5.40% of the spousal RRIF balance at the beginning of the year. That amount is taxable to her, though it qualifies as eligible pension income. That means, if it’s beneficial to do so, she can allocate up to 50% of that spousal RRIF income to you and have it taxed in your hands.

Attribution rules for spousal RRSPs and spousal RRIFs

There is one key difference between personal RRSPs and spousal RRSPs that you should be aware of—income attribution.

Usually, when a withdraw is made from a spousal RRSP, any amount up to the amounts contributed in the current year, or the previous two years, will be attributed back to the contributor. This prevents folks from making a spousal RRSP contribution and having their spouse withdraw it shortly after, creating an income-splitting loophole. Requiring those contributions to vest over a certain period ensures that the right person pays tax on income.

These rules also apply to certain spousal RRIF withdrawals.

When you convert the account to a spousal RRIF, those attribution rules cease to apply, but only on the minimum spousal RRIF withdrawals. Any withdrawals made in excess of the minimum are still subject to the attribution rules. If you haven’t contributed to the account this year or in the prior two years, or she plans on making only minimum withdrawals for the first few years, you don’t have to worry about this.

Should you transfer the funds to a TFSA? 

You mention the possibility of transferring the withdrawals to a tax-free savings account (TFSA). While that is an option, assuming your wife has TFSA room, the withdrawals will still be taxed.

If you don’t need the spousal RRIF withdrawals to meet your family’s expenses, using the proceeds to contribute to either her or your TFSA—or both—can be a great option to eliminate future taxes on investment income.

Read more from Ask a Planner:

• How spouses with joint accounts should claim capital losses
• How much to take out of your RRSP in your 60s
• Is now the time for retirees to sell stocks and buy GICs?
• Financial planning in your 70s

About Mark McGrath, CFP, CIM, CLU

Mark McGrath is a Financial Planner and Associate Portfolio Manager with PWL Capital Inc. He helps create financial clarity, confidence and comfort for Canadian business owners and professionals. PWL is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.

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