Do your clients want to make the most of their spousal RRSPs?
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Do your clients want to make the most of their spousal RRSPs?
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy. Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy. For convenience, he wants to convert them both into a single RRIF. However, once combined, the entire amount will become subject to the Three-Year Attribution […]
By Staff|
December 4, 2002 |
Last updated on December 4, 2002
4 min read
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
The staff of Advisor.ca have been covering news for financial advisors since 1998.
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Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
In 2000, Kathy makes her last contribution to a Spousal RRSP for her husband Tom, and benefits from immediate income tax savings.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
In 2000, Kathy makes her last contribution to a Spousal RRSP for her husband Tom, and benefits from immediate income tax savings.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
In 2000, Kathy makes her last contribution to a Spousal RRSP for her husband Tom, and benefits from immediate income tax savings.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
Kathy deducts the contribution from her own income.
Tom owns and controls the Spousal RRSP, and it grows tax sheltered.
When Tom eventually withdraws funds from the Spousal RRSP, they’re taxed at his lower tax rate, not Kathy’s.
The tax savings: now and later – With a Spousal RRSP, the higher income earner gets the tax break when the funds go in, and, assuming continued lower income, the lower earner pays the lower tax rate when the funds come out. The result is real tax savings both before and after they retire.
The catch: Three-Year Attribution Rule – If Tom withdraws money from his Spousal RRSP, it will be included in Kathy’s taxable income, and taxed at her higher rate, if she has made a Spousal RRSP contribution in the year of the withdrawal or the two preceding years. This rule effectively negates the initial tax relief — and it can’t be avoided by having different Spousal RRSPs in different institutions. For example, if Tom takes money out in 2002, it will be taxed to Kathy if she has made ANY contributions to ANY Spousal RRSP in Tom’s name in 2000, 2001 or 2002.
The strategy: use Annuities and RRIFs – Tom can avoid triggering the three-year tax liability if he first converts the Spousal RRSP to a vehicle that restricts his withdrawals – namely a regular payment Annuity or a minimum payment RRIF. Here are two scenarios.
Scenario #1:
In 2000, Kathy makes her last contribution to a Spousal RRSP for her husband Tom, and benefits from immediate income tax savings.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
The higher income spouse (suppose it’s Kathy) uses part of her RRSP contribution limit to put money into a Spousal RRSP in the name of the lower income spouse (Tom). Tom’s own contribution limit and personal RRSPs are not affected.
Kathy deducts the contribution from her own income.
Tom owns and controls the Spousal RRSP, and it grows tax sheltered.
When Tom eventually withdraws funds from the Spousal RRSP, they’re taxed at his lower tax rate, not Kathy’s.
The tax savings: now and later – With a Spousal RRSP, the higher income earner gets the tax break when the funds go in, and, assuming continued lower income, the lower earner pays the lower tax rate when the funds come out. The result is real tax savings both before and after they retire.
The catch: Three-Year Attribution Rule – If Tom withdraws money from his Spousal RRSP, it will be included in Kathy’s taxable income, and taxed at her higher rate, if she has made a Spousal RRSP contribution in the year of the withdrawal or the two preceding years. This rule effectively negates the initial tax relief — and it can’t be avoided by having different Spousal RRSPs in different institutions. For example, if Tom takes money out in 2002, it will be taxed to Kathy if she has made ANY contributions to ANY Spousal RRSP in Tom’s name in 2000, 2001 or 2002.
The strategy: use Annuities and RRIFs – Tom can avoid triggering the three-year tax liability if he first converts the Spousal RRSP to a vehicle that restricts his withdrawals – namely a regular payment Annuity or a minimum payment RRIF. Here are two scenarios.
Scenario #1:
In 2000, Kathy makes her last contribution to a Spousal RRSP for her husband Tom, and benefits from immediate income tax savings.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
The higher income spouse (suppose it’s Kathy) uses part of her RRSP contribution limit to put money into a Spousal RRSP in the name of the lower income spouse (Tom). Tom’s own contribution limit and personal RRSPs are not affected.
Kathy deducts the contribution from her own income.
Tom owns and controls the Spousal RRSP, and it grows tax sheltered.
When Tom eventually withdraws funds from the Spousal RRSP, they’re taxed at his lower tax rate, not Kathy’s.
The tax savings: now and later – With a Spousal RRSP, the higher income earner gets the tax break when the funds go in, and, assuming continued lower income, the lower earner pays the lower tax rate when the funds come out. The result is real tax savings both before and after they retire.
The catch: Three-Year Attribution Rule – If Tom withdraws money from his Spousal RRSP, it will be included in Kathy’s taxable income, and taxed at her higher rate, if she has made a Spousal RRSP contribution in the year of the withdrawal or the two preceding years. This rule effectively negates the initial tax relief — and it can’t be avoided by having different Spousal RRSPs in different institutions. For example, if Tom takes money out in 2002, it will be taxed to Kathy if she has made ANY contributions to ANY Spousal RRSP in Tom’s name in 2000, 2001 or 2002.
The strategy: use Annuities and RRIFs – Tom can avoid triggering the three-year tax liability if he first converts the Spousal RRSP to a vehicle that restricts his withdrawals – namely a regular payment Annuity or a minimum payment RRIF. Here are two scenarios.
Scenario #1:
In 2000, Kathy makes her last contribution to a Spousal RRSP for her husband Tom, and benefits from immediate income tax savings.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
The higher income spouse (suppose it’s Kathy) uses part of her RRSP contribution limit to put money into a Spousal RRSP in the name of the lower income spouse (Tom). Tom’s own contribution limit and personal RRSPs are not affected.
Kathy deducts the contribution from her own income.
Tom owns and controls the Spousal RRSP, and it grows tax sheltered.
When Tom eventually withdraws funds from the Spousal RRSP, they’re taxed at his lower tax rate, not Kathy’s.
The tax savings: now and later – With a Spousal RRSP, the higher income earner gets the tax break when the funds go in, and, assuming continued lower income, the lower earner pays the lower tax rate when the funds come out. The result is real tax savings both before and after they retire.
The catch: Three-Year Attribution Rule – If Tom withdraws money from his Spousal RRSP, it will be included in Kathy’s taxable income, and taxed at her higher rate, if she has made a Spousal RRSP contribution in the year of the withdrawal or the two preceding years. This rule effectively negates the initial tax relief — and it can’t be avoided by having different Spousal RRSPs in different institutions. For example, if Tom takes money out in 2002, it will be taxed to Kathy if she has made ANY contributions to ANY Spousal RRSP in Tom’s name in 2000, 2001 or 2002.
The strategy: use Annuities and RRIFs – Tom can avoid triggering the three-year tax liability if he first converts the Spousal RRSP to a vehicle that restricts his withdrawals – namely a regular payment Annuity or a minimum payment RRIF. Here are two scenarios.
Scenario #1:
In 2000, Kathy makes her last contribution to a Spousal RRSP for her husband Tom, and benefits from immediate income tax savings.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
Show how RRIFs and Annuities can minimize tax on withdrawal
If you have married clients who are taking advantage of Spousal RRSPs, they know how it splits their retirement income assets for tax savings today and after they retire.
But do they know that the tax savings can depend on when they take the money out? If they’re nearing retirement, it pays to remind them of the Three-Year Attribution Rule — and the steps they can take to avoid its negative tax implications.
First let’s review how the Spousal RRSP works.
The higher income spouse (suppose it’s Kathy) uses part of her RRSP contribution limit to put money into a Spousal RRSP in the name of the lower income spouse (Tom). Tom’s own contribution limit and personal RRSPs are not affected.
Kathy deducts the contribution from her own income.
Tom owns and controls the Spousal RRSP, and it grows tax sheltered.
When Tom eventually withdraws funds from the Spousal RRSP, they’re taxed at his lower tax rate, not Kathy’s.
The tax savings: now and later – With a Spousal RRSP, the higher income earner gets the tax break when the funds go in, and, assuming continued lower income, the lower earner pays the lower tax rate when the funds come out. The result is real tax savings both before and after they retire.
The catch: Three-Year Attribution Rule – If Tom withdraws money from his Spousal RRSP, it will be included in Kathy’s taxable income, and taxed at her higher rate, if she has made a Spousal RRSP contribution in the year of the withdrawal or the two preceding years. This rule effectively negates the initial tax relief — and it can’t be avoided by having different Spousal RRSPs in different institutions. For example, if Tom takes money out in 2002, it will be taxed to Kathy if she has made ANY contributions to ANY Spousal RRSP in Tom’s name in 2000, 2001 or 2002.
The strategy: use Annuities and RRIFs – Tom can avoid triggering the three-year tax liability if he first converts the Spousal RRSP to a vehicle that restricts his withdrawals – namely a regular payment Annuity or a minimum payment RRIF. Here are two scenarios.
Scenario #1:
In 2000, Kathy makes her last contribution to a Spousal RRSP for her husband Tom, and benefits from immediate income tax savings.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
Show how RRIFs and Annuities can minimize tax on withdrawal
If you have married clients who are taking advantage of Spousal RRSPs, they know how it splits their retirement income assets for tax savings today and after they retire.
But do they know that the tax savings can depend on when they take the money out? If they’re nearing retirement, it pays to remind them of the Three-Year Attribution Rule — and the steps they can take to avoid its negative tax implications.
First let’s review how the Spousal RRSP works.
The higher income spouse (suppose it’s Kathy) uses part of her RRSP contribution limit to put money into a Spousal RRSP in the name of the lower income spouse (Tom). Tom’s own contribution limit and personal RRSPs are not affected.
Kathy deducts the contribution from her own income.
Tom owns and controls the Spousal RRSP, and it grows tax sheltered.
When Tom eventually withdraws funds from the Spousal RRSP, they’re taxed at his lower tax rate, not Kathy’s.
The tax savings: now and later – With a Spousal RRSP, the higher income earner gets the tax break when the funds go in, and, assuming continued lower income, the lower earner pays the lower tax rate when the funds come out. The result is real tax savings both before and after they retire.
The catch: Three-Year Attribution Rule – If Tom withdraws money from his Spousal RRSP, it will be included in Kathy’s taxable income, and taxed at her higher rate, if she has made a Spousal RRSP contribution in the year of the withdrawal or the two preceding years. This rule effectively negates the initial tax relief — and it can’t be avoided by having different Spousal RRSPs in different institutions. For example, if Tom takes money out in 2002, it will be taxed to Kathy if she has made ANY contributions to ANY Spousal RRSP in Tom’s name in 2000, 2001 or 2002.
The strategy: use Annuities and RRIFs – Tom can avoid triggering the three-year tax liability if he first converts the Spousal RRSP to a vehicle that restricts his withdrawals – namely a regular payment Annuity or a minimum payment RRIF. Here are two scenarios.
Scenario #1:
In 2000, Kathy makes her last contribution to a Spousal RRSP for her husband Tom, and benefits from immediate income tax savings.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
Show how RRIFs and Annuities can minimize tax on withdrawal
If you have married clients who are taking advantage of Spousal RRSPs, they know how it splits their retirement income assets for tax savings today and after they retire.
But do they know that the tax savings can depend on when they take the money out? If they’re nearing retirement, it pays to remind them of the Three-Year Attribution Rule — and the steps they can take to avoid its negative tax implications.
First let’s review how the Spousal RRSP works.
The higher income spouse (suppose it’s Kathy) uses part of her RRSP contribution limit to put money into a Spousal RRSP in the name of the lower income spouse (Tom). Tom’s own contribution limit and personal RRSPs are not affected.
Kathy deducts the contribution from her own income.
Tom owns and controls the Spousal RRSP, and it grows tax sheltered.
When Tom eventually withdraws funds from the Spousal RRSP, they’re taxed at his lower tax rate, not Kathy’s.
The tax savings: now and later – With a Spousal RRSP, the higher income earner gets the tax break when the funds go in, and, assuming continued lower income, the lower earner pays the lower tax rate when the funds come out. The result is real tax savings both before and after they retire.
The catch: Three-Year Attribution Rule – If Tom withdraws money from his Spousal RRSP, it will be included in Kathy’s taxable income, and taxed at her higher rate, if she has made a Spousal RRSP contribution in the year of the withdrawal or the two preceding years. This rule effectively negates the initial tax relief — and it can’t be avoided by having different Spousal RRSPs in different institutions. For example, if Tom takes money out in 2002, it will be taxed to Kathy if she has made ANY contributions to ANY Spousal RRSP in Tom’s name in 2000, 2001 or 2002.
The strategy: use Annuities and RRIFs – Tom can avoid triggering the three-year tax liability if he first converts the Spousal RRSP to a vehicle that restricts his withdrawals – namely a regular payment Annuity or a minimum payment RRIF. Here are two scenarios.
Scenario #1:
In 2000, Kathy makes her last contribution to a Spousal RRSP for her husband Tom, and benefits from immediate income tax savings.
In 2002, Tom wants to begin withdrawing money from his Spousal RRSP.
However, the Three-year Attribution Rule means his withdrawals will be taxed to Kathy at her higher rate. Solution: Annuity or RRIF
Tom uses the Spousal RRSP to purchase an Annuity in his name. This avoids the three-year rule, and the withdrawals are taxed to Tom, at his lower rate.
OR Tom converts the Spousal RRSP to a RRIF in his name. This also avoids the three-year rule, as long as he takes only the minimum required payments in 2002. Any RRIF payments above the minimum will be taxed to Kathy at her higher rate – up to the amount of her Spousal RRSP contribution in 2000. Then, once the three-year window has passed, Tom can increase his payments as desired.
Scenario #2:
Tom has his own RRSP as well as a Spousal RRSP from his wife Kathy.
For convenience, he wants to convert them both into a single RRIF.
However, once combined, the entire amount will become subject to the Three-Year Attribution Rule, restricting Tom to minimum RRIF payments, as above. Solution: Annuity and RRIF
Tom uses the Spousal RRSP to buy a fixed payment Annuity, which avoids the three-year rule. He uses the regular Annuity payments to cover essentials like housing, food and bills.
AND Tom converts his own RRSP (which is not subject to the three-year rule) into a RRIF. He uses the flexible RRIF payments to cover extras like vacations, renovations and emergencies. With no minimum payment restrictions, he can withdraw any amounts needed for these special expenses.
The tax benefits of a Spousal RRSP can be dramatic, especially if spouses have significantly different incomes. But often couples nearing retirement realize they should have begun much earlier. Take the time now to discuss Spousal RRSPs and the vital role of RRIFs and Annuities. For more on how they can benefit your clients and your business, please visit www.sunlife.ca/advisor.
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