What Is A Spousal RRSP? And Why Should You Use It?

What Is A Spousal RRSP? And Why Should You Use It?

Income splitting is often talked about in reference to high-income earners, but what about the average Canadian family? How does the average Canadian family split income and minimize tax? A spousal RRSP is one way for the average Canadian family to easily split income in retirement.

For high-income earners there are income splitting strategies like spousal loans or “income sprinkling”. Spousal loans are for families with lots of non-registered savings and a large difference in marginal tax rates between spouses. “Income sprinkling” can be used by families who own a corporation (although with the new TOSI rules has changed dramatically).

But what about your average Canadian household? Are there are income splitting options for them?

One very easy and accessible type of income splitting is a spousal RRSP. Unlike other income splitting strategies this one is very easy to set up, it doesn’t require a lawyer, and it’s easy to understand.

The big benefit of a spousal RRSP is that the average family can use it to “equalize” their registered assets before retirement. This allows for a more equal distribution of income in retirement and a lower overall tax bill for a household.

In addition to lower income tax it also opens up more opportunities to maximize government benefits in retirement.

But you might be wondering, isn’t it possible to split income after age 65 anyway, why would I need a spousal-RRSP?

While it’s true that after age 65 income splitting is much easier to do, it’s still a best practice to try to equalize registered assets before age 65. This allows for the maximum flexibility when creating a retirement drawdown strategy, especially when retiring early.

Equalizing registered assets can be extremely beneficial, especially before the age of 65 when there are fewer income splitting opportunities, for this reason we sometimes want to look at using a spousal RRSP to help split income in the future.

The Benefits Of Retirement Planning

The Benefits Of Retirement Planning

Retirement planning is complex and includes many important considerations like retirement spending, income tax planning, income splitting, maximizing government benefits, deciding when to take CPP and OAS etc. etc.

All of these individual parts work together to create a great retirement plan. They are so important that even a small mistake can mean lower retirement spending or a higher chance of running out of money in the future. It could mean $10,000’s in extra tax or $10,000’s in reduced government benefits.

With a typical retirement plan spanning 30-40+ years it’s easy to understand how small change in assumptions can have a big effect on a retirement plan.

There are also many small decisions to consider when planning retirement, like when to convert RRSPs to RRIFs, when to start CPP, when to start OAS, how much to draw from investment assets, which investment assets to draw from first etc. etc.

In this post, we look at some of the important parts of retirement planning. What they are, what you should consider, and some additional resources to help.

The Tax Free First Home Savings Account (TFFHSA) Explained

The Tax Free First Home Savings Account (TFFHSA) Explained

There is a new tax advantaged account in Canada, the Tax Free First Home Savings Account! Along with the TFSA and RRSP, the new Tax Free First Home Savings Account (TFFHSA) is another great way to reach your financial goals in a very tax efficient way. The account provides a significant advantage to those planning to purchase their first home and creates a new option for parents who are thinking about helping their children with a future home purchase.

The new Tax Free First Home Savings Account (TFFHSA) does add a little bit of complexity to an already complex landscape of tax planning options, however like the TFSA and RRSP, if used properly it can help accelerate progress towards financial goals like purchasing a home and planning for retirement.

When saving and investing for future goals you can now choose between TFSA, RRSP, and the new TFFHSA, and for families with small children, there is the RESP too.

The new Tax Free First Home Savings Account is very new, so in this post we’re going to explore how this account works, the eligibility criteria, the contribution and withdrawal rules, some things to possibly watch out for, and some strategic options when using it within your financial plan.

Canada Child Benefit Increase! What Will Your Monthly CCB Be?

Canada Child Benefit Increase! What Will Your Monthly CCB Be?

The Canada Child Benefit is one of the most generous government benefits in Canada and it just increased! Unlike many government benefits, the Canada Child Benefit is available to low, moderate, and also some high income families.

The amount you receive from the Canada Child Benefit (CCB) depends on a few factors, one is the taxable net income for the family (line 23600 on your tax return), another is the number of children in the family, and the final factor is the age of each child.

The Canada Child Benefit is an “income tested” government benefit. The higher your taxable net income is, the lower your Canada Child Benefit will be. For some high income families, at a certain level of income the Canada Child Benefit will be reduced to $0. Anyone with income above that income level will not receive any benefit. The tricky thing is that this income level is different depending on the number of children and their ages.

The Canada Child Benefit also changes every year. New benefits start in July and are based on prior years tax return (the first payment of the updated benefit is July 20th).

The Canada Child Benefit also increases with inflation. The new 2022 Canada Child Benefit has increased by 2.4% versus 2021.

So how much Canada Child Benefit can you expect in July? We’ve got a table below that shows the Canada Child Benefit based on family taxable net income (line 23600) in $10,000 increments, so you can figure out generally how much you can expect in July.

Don’t Get Surprised By OAS and CPP Survivor Benefits

Don’t Get Surprised By OAS and CPP Survivor Benefits

For many people, CPP and OAS will make up a significant portion of their retirement income. A reduction in CPP and OAS income due to CPP survivor benefits or OAS survivor benefits can be very stressful. Even more so because this reduction will follow the unexpected death of a partner or spouse.

Many people may not realize, but OAS and CPP survivor benefits are reduced by anywhere from 40% to a full 100%!

For higher income households, who may have significant assets in either RRSPs or TFSAs, it’s not uncommon for CPP and OAS to make up 25%-30% of their retirement income.

For lower and moderate-income households, government pensions like CPP and OAS can provide 50%-75% of their retirement income.

For very low-income households, CPP and OAS, when combined with other low-income benefits like GIS, can easily make up 100% of retirement income for some couples.

In all of these situations, losing even some of these benefits can result in a big change to retirement plans, and what many people may not realize is the extent to which some of these benefits can be reduced when a partner passes away.

Although difficult and unpleasant to even think about, the impact of a partner’s death is an important consideration for many retirement plans. It’s important to understand what changes there might be to both retirement income and retirement spending if the unfortunate were to happen.

For some plans, those which have a large amount of investment assets, the risk is much smaller. Investment assets inside RRSPs and TFSAs can be transferred through spousal rollovers with no tax consequences. So, the disruption to these plans may be smaller.

But for some plans, the change in CPP and OAS income due to an unexpected death can be quite large, especially in certain circumstances. In the worst-case scenario, the loss of CPP and OAS combined can easily represent more than $20,000 per year in lost retirement income!

Here’s what to watch out for when it comes to CPP survivor benefits…

Low Income Benefits That Are NOT Automatic

Low Income Benefits That Are NOT Automatic

There are a large number of benefits available to low and moderate income households. Some of these benefits are government benefits, they provide direct income support. But some of these benefits are a combination of government & private benefits, and they help offset specific expenses.

Many government benefits are automatic based on annual tax filing. As long as an income tax return is filed on time each year, these benefits are automaticity calculated and paid based on adjusted family net income (aka. AFNI… this is essentially line 23600 of your tax return).

But there are other benefits that are available to low and moderate income households and these benefits must be applied for individually, and are not automatic based on annual tax filing, but they can still provide a significant benefit for low and moderate income households.

Most of these non-automatic benefits are delivered with help of private companies and they help offset specific types of expenses. These benefits are a combination of government/private and must be applied for every 1-2 years.

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