[...] only reinforces entrepreneurial distrust of life-time employees giving them advice, but look at the spousal contributions to retirement portfolios, loss-carry back tax rules or similar tax planning. This involves a fair bit of co-ordination [...]

Good point. Up to $40K works for the receiving spouse, but that could push the contributing spouse into the low tax bracket.

Ed

You may be right about not using RRSPs in your case, although it is usually better to actually work out your retirement income, not just assume. TFSAs generally are about equal to or slightly better than RRSPs if you will retire in the same tax bracket as when you contribute.

Insurance is not really comparable, since it requires that you actually have a need for insurance for life – which few people do. It usually also comes with high fees and limited investment choices.

The SM may actually be a good strategy for you. For people with large pensions, they usually get little RRSP room and may be in higher tax brackets after they retire.

If you retire with only pensions and RRSPs, then every dollar is fully taxed. If you need to buy a car or have a larger expense, how do you get money without paying full tax?

If you do the SM or use TFSAs, then you can have a portfolio with low tax after your retire. This is a great complement to a large pension.

For our retired clients that have both significant RRSP/pension plus significant non-RRSP/SM portfolios (nobody has a large TFSA yet), then we can plan their retirement income very effectively by determining how much to take out of which pot.

Yes, you need a separate spousal RRSP. It must be a separate RRSP from your wife’s own RRSP and show you as the contributor.

Ed

Well, you’re not completely correct in saying that you would see the same 20% benfit if you transferred $40,000 per year.

if you had room, you COULD transfer $40,000 all at once, but you likely would not see the same benefit. The downside is not on the on tax bracket of the low-income spouse, it’s on the side of the CONTRIBUTING spouse.

Say for example, I make $100,000 in Ontario. If I contribute $10,000 I will net 43.41% – 20.05 = 23.36% on my whole transfer.
If I transferred $40,000, my income would go down to $60,000 and I would only be making 31.15 – 20.05 = 11.05% on my last dollar.

So, if the low income spouse is going to have 0 income for a few years, it would generally not be advisable to to one large transfer even if you did have the room.

Thanks for taking the time to reply.

We will both have federal govt pensions when we retire (equal to 70% of the best 5 years of work). I’m pretty sure the amount we will receive will put each of us in the highest tax bracket at retirement, and thus why I never really intended to accumulate much in RRSPs. Deferring the tax today, to pay it again later. There are other strategies to avoid taxes (life insurance, tfsa).

It looks like I will maximize RRSP contributions for my wife before tomorrow’s deadline and do that same next year while she’s still in the 42% tax bracket. Then I will pull it out while she’s off while and she’s in the lowest tax bracket.

One follow up question- I also have about 30K worth of RRSP room. If I contribute to my RRSP, can she also pull from it during those 5 years off of work? Or do I have to open a seperate “Spousal RSP” ? I understand that for Spousal RRSPs, there’s a 3 year wait time prior to withdrawl to avoid being taxed at my tax bracket.

Thanks again.

Charles

Yes, she can contribute and immediately withdraw. That would provide a tax deduction for 2009 and income for 2010.

A full answer to this question would require knowing her estimated taxable income for each year and how much RRSP room she has (probably not much if she has a good pension).

However, the biggest tax deduction comes from using the 42% bracket that starts at about $76,000 income/year. So, if she makes $100,000, then the biggest benefit is from contributing $24,000 on which she would get a refund of 42%.

When you withdraw, make sure her taxable income for that year remains under $41,000. Her tax bracket is essentially the same (21%) from $0 to $41,000/year income when you include you claiming the spouse deduction.

If she contributes $24,000 at the 42% bracket and then withdraws in a future year at 21%, then she gains about $5,000.

You are losing her RRSP room, but it sounds like you don’t intend to accumulate much in RRSPs because of your 2 pensions – is that right, Charles?

Ed

Your strategy works, with a couple of qualifiers. The main disadvantage is that you are using up your RRSP room without adding new investments.

If you had more room, the strategy would work with larger amounts,as well. The tax credit for claiming your spouse is essentially 21%, which is the same as the lowest tax bracket that goes up to about $41,000/year. So, if your income was $40,000 above the bottom of the 40% tax bracket and you had $40,000 room, you could do that same strategy with $40,000/year with the same 20% benefit.

Ed

My wife is currently on Mat leave and is topped up by her employer to 90%. This top up will expire in March of 2010. Instead of going back to work as scheduled in March, she has asked for an additional 6 months of leave without pay (you can do that with the Govt), and plans to go back to work in September 2010. She currently only has around 6K of RRSP savings and has tons of unused RRSP room left. My first question is the following:

1) can she make a large contribution before the deadline and then withdraw that money during her 6 months without income? I understand this is probably not the best move considering she will have half of year’s worth of income in 2010, however I’d like to know if it is possible to do that. What are the miminum timelines for withdrawl?

My wife plans to go back to work in Sept 2010 pregnant with our second kid, take another full year of maternity (with 90% top up) which would end around the January 2012 time frame and then follow it up with up to 5 years off of work to raise the children. The question now becomes:

1) how can I maximize RRSP contributions starting now so that I can withdrawl the money when she is home for 5 years.

I make around 100K (and so does she actually), and we will both have excellent pensions when we retire (which is in about 30 years and).

Any advice would be helpful and appreciated. Thanks

alzo, since Mark’s wife won’t have any tax owning for the year even after the withdrawal, she’ll get the withholding tax refunded when she files.

My wife and I both worked for 7 or 8 years before we decided to have kids. My wife had a good income and invested well, now she has probably socked away say $70,000 – $80,000 in her (regular) RRSP. We now have a couple of kids, and my wife has decided to take 5 or 6 years off work and for most of those years her income will be 0 (or close to 0)

I also contributed to my RRSPs, but I currently have around $10,000 in room.

So….

Every year for the next few years, my wife withdraws from her regular RRSP an amount that is equal to my RRSP Contribution Room. I then contribute that amount to her spousal RRSP. That is the meaning of my statement “Repeat yearly until I run out of RRSP room.”

In short, every year, we are essentially just “transferring” an amount equal to my contribution room from my wife’s regular RRSP to her spousal RRSP. It costs us nothing to do this, it does not reduce the amount she has saved for retirement, and the government gives us 43.5% of this “transfer” back in cash. (Which we can invest in a TFSA or whatever.)

There are probably a lot of people in a similar situation (who have a spouse who works but may want to take a few years off to raise kids) that can use this strategy. I can’t think of any reason not to do this.

“Net result: She still has the exact same amount of money in her RRSPs. Revenue Canada gives us a $4000 tax credit. Nice.”

Of course your wife will then have $10,000 taxable income to claim, and you will lose any dependent deductions you had due to her lack of income. You might not see the whole $4000

DAvid

“
I am in the 40% bracket, my wife earns 0. She has a regular RRSP. She withdraw $10,000 from her RRSP. We open a spousal in her name. I contribute $10,000 to the spousal.

Repeat yearly until I run out of RRSP room.”

Your wife has $10k in her RRSP, withdraws it, pays no tax because of low income, then gifts the money to you to deposit into a spousal RRSP which will give you a tax deduction. That is sound.

Where I am confused is when you say repeat yearly. Do you simply mean that you will simply continue contributing to the spousal RRSP?

“