Do we need spousal RRSPs if our salaries are the same?

Q: I have a question about whether my wife and I should consider using a spousal RRSP. I’m 32, self-employed, paying myself an $80,000 annual salary and have a personal RRSP of around $160,000. My wife is also 32 and she’s employed with a company that provides a defined benefit pension. She is making around $70,000 per year and has a personal RRSP of $60,000.

Considering our employment status and how our salary levels don’t differ too much, does it even make sense to have a spousal RRSP? Or should I just assume that pension income splitting will still be around by the time I retire?

—Vince

A: The purpose of a spousal RRSP is to try to keep the taxable income of two spouses similar in retirement. You benefit as a couple if you can equalize your investable assets and ultimately the amount of income received in later years. Based on your situation this income could come from various sources such as Registered Retirement Income Funds (RRIFs), a defined pension plan, Old Age Security, and Canada Pension Plan to name a few.

All else being equal (assuming pension income splitting is available), if one spouse has a larger amount of money in an RRSP at retirement they would have to withdraw more money based on the RRIF withdrawal rules. As a result, the higher income earner will pay more income tax than if each spouse had an equal amount of RSPs and similar incomes.

The goal as a couple is to be in a lower tax bracket and pay income tax at the same lower marginal tax rate. I would recommend keeping your RRSP balances fairly close throughout your working years.

At this time I am not sure what your wife’s potential defined benefit pension would be at retirement age. As a result, it is difficult to project what her future income will be and therefore the future tax on income received.

I would recommend requesting a pension projection from her employer providing the defined benefit pension amount. Ask them to do a projection showing the taxable pension income at her retirement date. Also, ask if the defined pension income is indexed to inflation and if so at what rate or percentage. This will allow you to understand the amount of potentially taxable income that will be generated from this source at retirement.

I would also suggest getting a projection for both of your RSPs illustrating what you will each accumulate at retirement and also what amount of taxable income will be generated.

A good option would be to have an independent professional advisor create a financial plan and project some scenarios taking into consideration your current investable assets (RSPs), future contributions, growth rates and all future taxable income sources. Regular annual reviews are also recommended.

This will provide more clarity around what amount of taxable income you would each receive at retirement based on where you both are now. Then if there is a large divergence in assets and taxable income at retirement age you can look at course correcting it now. One way would be you contributing to a spousal RSP.

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Dean Kendall is a Chartered Financial Consultant® with Ideal Life Experience Ltd. in Calgary

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