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Dear Nancy Woods,
I have been contributing to a spousal RRSP for my wife for a number of years to help equalize the future income from my company pension. Should I keep doing it now that there is pension income splitting?
Signed, Tom
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Dear Tom,
Before the tax rules changed to allow the splitting of pension income with one's spouse, it certainly made sense to contribute to a spousal plan if one's spouse has a projected lower income in retirement. Contributing into a spousal plan created a future income stream taxed in the spouse's hands at her tax bracket, as opposed to all of the income taxed at your higher tax bracket.
Since 2007, the government tax rule change has allowed Canadians the option for their spouse to declare as income some or part of your pension income (up to 50 per cent). Because you can split pension income, it may not be necessary to contribute to your spouse's RRSP. It is important to note that you are in effect gifting that money to your spouse and the assets are no longer yours.
This type of future planning is, of course, contingent on the tax rules not changing.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can send your questions to asknancy@rbc.com as well.