Posted by Tim Stobbs on February 20, 2007
Q: Maybe someone could comment on a strategy I’m developing. My wife is older then myself (She is 55 and I’m 47), and she has stopped working. We plan to start withdrawing from her spousal RRSP account in three years to reinvest it in a Corporate Class Fund. Is this a sound investment plan? I figured it would be taxed lower at this point. When the RRIF point approaches we won’t be forced into taking larger sums of money at a higher tax rate. Some details that might help are I’m in the $40,000 tax bracket and I will retire at 55 with a full pension. My wife worked part time and earn around $15,000. I will continue adding to my own RRSP although the tax break isn’t that large. The tax saving probably won’t be that large from this plan, but the concept interests me.
A: By the way in the interest of full disclosure I’m not a tax or investment professional, I just read a lot about personal finance and these are just my suggestions and should not be considered recommendations.
Pulling money out of a spousal RRSP would be a good idea if she isn’t working since you can pull out up to the personal income tax deduction with no tax at all (provided she has no other income). So from now until you turn 55 you could pull out around $8000/year for a total of $8000 x 8 years = $64,000. (Check you province limits on www.taxtips.ca to confirm the exact number and any limits on spousal withdrawals) When you make the withdrawals do it in amounts of less than $5000 to reduce the withholding amount to 10% (or 5% in Quebec). You should get the amount back when you file taxes, but you will still have the withholding amount up front.
Once you turn 55 and start taking your pension you will want to reassess your situation. With the new pension splitting rules you might find it more useful to split your pension and take the tax hit on any RRSP withdrawals. You will have to do your own math on that one since I’m not sure exactly how that all works yet.
As for your choice of investment, Corporate Class Funds tend to have expensive fees with them so you might want to shop around for other options and make sure it makes sense for your situation. Some good dividend paying stocks might be a better option if they are invested in your wife’s taxable account and they make sense in your overall allocation and comfort level. Check out the taxtips.ca web site to make sure you understand how each investment type will be taxed.
So follow reader’s any additional comments or ideas on what to do please feel free to leave a comment.