How to make a spousal RRSP work for you

P O R T F O L I O   F I X

THE PROBLEM

James and Claudia Williams are in an envious position. The’ve paid off their home, they’re debt free and they have healthy savings in RRSPs, TFSAs, and other accounts. They’ve also just welcomed their first child and are already talking about having another sometime in the next few years. But as well as they’ve managed their money they know having kids will put pressure on their savings and they want to be prepared.

Claudia, a 29-year old office worker, and James, a 34-year-old environmental field worker in the energy sector, both have group RRSPs through their employers that gives them access to low cost mutual funds. “We’ve have been happy with our annual returns of 5% net over the past few years,” says James.

Now James wonders if this is a good time to do a little tax planning. “I’m in the top tax bracket and Claudia earns much less,” he says. That higher income has allowed him to amass more than $60,000 in his savings account. Since he has unused RRSP contribution room, James is looking to set up a spousal RRSP. Ideally, he would like the spousal RRSP to stay with his employer to take advantage of Manulife mutual funds they offer in his benefits plan. “I’d like to invest the entire $62,258 in a spousal RRSP but I’m not sure how I should time the contributions to get maximum tax relief,” he says.

James is trying to answer two key questions. First, he wants to know if he should invest the $62,258 entirely into a spousal RRSP this year, or if he should split it up over two, or even three years. And second, he wonders if he should keep the spousal RRSP investments aggressive, like his other savings. Right now the couple has an aggressive portfolios made up of 90% equity mutual funds and 10% fixed income funds.

So is a 90/10 spousal RRSP portfolio of equities and fixed income a good strategy for the Williams? Or is a different mix more appropriate?  “On one hand we’d like the money to be available to remove from the spousal RRSP if Claudia is in a lower tax bracket and we need it for a large purchase, but at the same time we may never touch that money until she retires,” explains James. “So it’s difficult to know what investment choice is best. Any suggestions?”

Before

THE FIX

A spousal RRSP is a good idea when the partners have different incomes and retirement savings balances. If James contributes to a spousal RRSP for Claudia, it will help balance out their retirement savings, says Vickie Campbell, a certified financial planner in Ottawa. It is very important that they understand the rules with respect to spousal RRSP’s. With a spousal RRSP, Claudia can withdraw the money as long as no contribution to any spousal RRSP is made in the year she withdraws the money or in the two proceeding calendar years. Otherwise, James will pay the tax on the withdrawal. Therefore, a spousal RRSP is not a good vehicle for short-term savings.

James was wondering about the timing of making an RRSP contribution to the spousal plan. He is best to tax shelter the money as soon as possible—especially because he is in a high tax bracket. He may also want to consider contributing the full amount to the RRSP this year. Having his money invested may provide for greater growth than a savings account. He may receive a tax refund. This could then be contributed to their TFSA, which is a better vehicle for a major purchase or emergency funding.

As for James and Claudia aggressive portfolio mix of 90% equities and 10% fixed income, Campbell isn’t overly concerned. This may be suitable for them and the spousal RRSP as well since they have a longer investment time frame and no debt, she explains. James can use an appropriate mix of Manulife mutual funds offered through his employer’s group RRSP plan since he’s comfortable with them already. One solution may be to put 10% into a Manulife fixed income mutual fund and split the other 90% four ways with 22.5% in a Canadian equity fund, 22.5% in a Canadian growth fund, 22.5% in a U.S. equity fund and 22.5% in an international equity fund. Still, it’s important to review this with a financial planner to ensure it is compatible with their risk tolerance.

Next step? Maybe a TFSA for Claudia (she doesn’t have one yet) or RESPs for their baby. It’s never too early to start.

After