Pension income splitting can reduce a couple’s overall tax bill by taking advantage of a spouse’s or common law partner’s lower marginal tax rate where retirement incomes of spouses are disproportionate.
Changes to the federal tax rules allow a Canadian resident individual receiving eligible pension income to allocate up to 50% of this income to their spouse. The use of Spousal RRSPs as an income splitting tool may still be recommended despite the opportunities created by pension income splitting, since Spousal RRSPs will allow for additional income splitting prior to age 65. In addition, a Spousal RRSP provides a further opportunity to increase the amount of income splitting beyond the 50% limitation provided by the new rules.
A spousal RRSP offers income splitting opportunities with your spouse or common-law partner. The most advantageous scenario for a spousal RRSP occurs when the planholder would otherwise have little retirement income, while the contributing spouse would have the majority of the couple’s income. For example, if you will be paying tax at the top rate, a $5,000 payment from your RRSP might result in $2,500 of income tax. If your spouse has little retirement income, a $5,000 payment from a spousal RRSP might be received tax free. That’s a $2,500 tax saving each year.
Contact us to make your RRSP contribution, or to discuss how we can help you achieve your retirement goals.