Q&A: Draw from spousal RRSP to pay debt?

Question: I am 52 years old and have $26,000 invested in spousal RRSPs. I also am $80,000 in debt. This spousal RRSP has been set aside for three years now. I was told that after three years, I can draw $10,000 a year tax-free because my wife does not work. My question is should I draw some or all of my RRSP money and pay some of my debt or let the RRSP grow? – Louis B.

Gordon Pape’s answer: First, let’s be clear about one thing. You refer to the $26,000 as “your” money. It is not! When you contributed it to the spousal plan, you effectively gave it to your wife. It’s her RRSP and her money, so she would have to make the decision on whether to withdraw any of it.

If your wife chooses, she can withdraw money from the plan if it has been three years since any contributions were made. The Canada Revenue Agency (CRA) will regard this as her income and it will not be attributed back to you. If she has no other income she can withdraw up to $9,039 in 2006 and pay no tax because the withdrawal would be offset by the Basic Personal Amount. Keep in mind, however, that if she does this you will lose the tax credit you can claim for her as a spouse. So while she n’t pay any tax, you’ll pay more.

Unless you live in Quebec where the rate is higher, there will be withholding tax of 10 per cent or 20 per cent when she makes the withdrawal (depending on the amount taken out). However, this will be recovered when she files her tax return.

On that subject, a reader wrote to say that he had been advised differently by a CRA employee and that withholding tax would not be refunded. That advice was incorrect – as long as she is a Canadian resident, she’ll get it back.

Now, should you do it? You don’t say how old your wife is so let’s suppose she is the same age as you. She does not have to collapse her RRSP until age 69, which would be 17 years from now. If the money is left untouched and compounds at an average annual rate of 8 per cent, it will grow to over $90,000 during that period. That could generate about $7,000 a year in income for her, which would be tax-free assuming the laws don’t change.

You will have to weigh that against applying the money now against the debt. Your decision should be based on what type of debt it is and whether you can afford to carry it without undue financial hardship. You and your wife are the only ones who can make that call.

Do you have a money question you’d like to ask Gordon Pape? E-mail it to [email protected] and then check our website every week to see if it was chosen for a response. Sorry, we cannot send personal answers.