The tax benefits of income splitting

Spousal RRSPs are one of the few ways that a married or common law couple can save tax dollars by income splitting. They are plans under which your spouse is the annuitant, and to which you can make your contributions. The total of your contributions to the spousal RRSP and/or your own RRSP cannot exceed your own contribution limit for the year. Contributing to a spousal RRSP does not affect your spouse’s ability to contribute to his or her own RRSP, based on his or her own personal contribution limit.

The primary benefit of spousal RRSPs is income splitting during your retirement years. If you will be in a higher tax bracket than your spouse during retirement, you can achieve significant savings through a spousal RRSP.

A spousal RRSP essentially shifts retirement income into the hands of the lower tax bracket spouse, while allowing the higher bracket spouse to obtain the tax deduction when the contribution is made.

Keep in mind that with spousal RRSPs, the plan and plan assets are owned and controlled by your spouse. In addition, amounts withdrawn from spousal RRSPs are taxable to the contributor if any spousal contributions have been made in the year of the withdral or on the two previous calendar years.

Spousal RRSPs are a great way to save tax during your retirement years. They are easy to open, and are available to a married as well as common law spouse. Why not take advantage of one of the few remaining ways to income split with your spouse? Talk to your Financial Advisor about your RRSP today.

If you would like to learn more about income splitting, contact your Financial Advisor or the CARP Retirement & Savings Program Manager at 1 800 563-6623 .

Financial Tips courtesy of Merrill Lynch Canada Inc.