Money talks: alphabet soup – Specialty RRSP accounts
by Arnold Machel, CFP®
“Committed and persistent work pays off; get-rich-quick schemes are rip-offs.” – Prov 28:20 (MSG)
Last month we discussed RRSP accounts: the rules that define their use, their benefits and their similarities and differences when compared to TFSA accounts. Today we want to take a look at some of the specialty versions of RRSP accounts: spousal RRSPs and Locked-in Retirement Accounts (LIRAs), also known as Locked-in RRSPs.
Often you will see the code SRSP on a statement indicating a spousal RRSP. Spousal RRSPs are owned by the annuitant, but may have an alternate contributor: the spouse.
The contributor gets the initial tax break, but the annuitant is the legal owner. They are also the one who pays the tax on withdrawal, with one important exception: if the funds are withdrawn from a spousal RRSP and any spousal contributions have been made into any spousal plan in the current or any of the two prior years, then the withdrawal will be attributed to the contributor and they will be the one who pays the tax bill.
In other words, if Wilma Flintstone contributes to Fred’s spousal RRSP and he withdraws the money next year, Wilma will get a tax break this year, but will have to pay tax on the withdrawal next year. If Fred waits a few more years and Wilma doesn’t make any more spousal contributions, then Fred would be the one who pays the tax.
This can give rise to some planning opportunities if Fred has little or no income. He could withdraw money out of his own RRSP (or even his spousal, if no contributions have been made lately), give it to Wilma, and have her contribute it to his spousal plan. He pays little or no tax and she gets an awesome tax break.
In the past, when income splitting in retirement was very restrictive, these plans were paramount. They were the best possible way to arrange for future tax savings. Now that income splitting in retirement is much easier, they have become less important; but knowing that rules change, most advisers will still recommend strategies to equalize income in retirement, including the use of spousal RRSPs during the contribution years. Or in niche circumstances, they may recommend tax savings strategies like the one that Wilma and Fred used.
When converted to a RRIF, they must be converted to a spousal RRIF and as long as only the minimum required withdrawal is taken, the income will be attributed to the annuitant.
One final note about spousal RRSPs. The spousal designation sticks with the plan in perpetuity even if the spouse stopped contributing decades ago. The designation can only be removed upon a marriage breakdown or the death of the contributor.
Typically, when funds are transferred from a pension, a portion of them will be required to be transferred into a Locked-in Retirement Account (LIRA) or a locked-in RRSP. For all intents and purposes these two account types are identical. If the pension was federally regulated, all or a portion will transfer to a locked-in RRSP; if provincially regulated, a LIRA.
Locked-in plans must adhere to the same rules and regulations that a regular RRSP, does with the addition of a restriction on withdrawals. The locked-in designation stays with the plan even when converted to a RRIF. Withdrawals from a locked-in plan cannot be made until the annuitant is 55 years of age and are restricted to an amount somewhat above the minimum required and dependant on the age of the annuitant and the province that the plan is regulated in. For example, a locked-in plan for a BC resident aged 65 would have a minimum withdrawal of 4.00% of the plan’s value and a maximum withdrawal of 7.38%.
There are a few exceptions that may allow someone to access Locked-in moneys prior to retirement, such as the annuitant…
having a reduced life expectancy
being unemployed or having a low income
becoming a non-resident of Canada
having a LIRA balance below a certain amount
Obviously less restriction is better than greater restriction, so one would never voluntarily contribute to a locked-in RRSP, but contributing to a spousal RRSP may be something that would provide a great advantage.
Before making the contributions, make sure to understand the implications and get help if you’re not sure.
Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area.He attends Gracepoint Community Church where he serves on the Leadership Team.He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services.Questions and comments can be directed to him at email@example.com or through his website at www.visionvest.ca.Please note that all comments are of a general nature and should not be relied upon as individual advice.The views and opinions expressed in this commentary may not necessarily reflect those of IPC Investment Corporation. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.