0:09

Hello and welcome back to the Canadian Money Roadmap

0:11

Podcast . I'm your host

0:13

, evan Newphill . We're

0:18

into February , and so that means people

0:20

are looking at their RRSP's

0:22

and looking to maximize the benefit from it . In

0:25

this episode , I'm going to be talking about a strategy

0:27

that you might not have considered before

0:29

, which loops in the spousal

0:31

RRSP . Welcome

0:40

back to another episode here , if you are joining

0:42

me in February . We are

0:44

coming up on the last few

0:47

days of contributing to an RRSP

0:49

for the 2023

0:51

tax year . Rrsp's

0:53

are a little unique in that they are less

0:55

based on the calendar year and more so connected

0:58

to the tax year . You

1:02

get the first 60 days of

1:04

every year to contribute for the previous

1:06

year . That way , you have enough time to figure out

1:08

how much income you had in the past

1:10

, so you can optimize your

1:12

contributions based on years when you know you

1:15

had a certain level of income . Before

1:17

I get into the meat of the , I'm

1:20

going to recommend today , for those of you who

1:22

are new to RRSP's or

1:24

need a bit of a refresher , I'm going to start there

1:26

how RRSP's so that's

1:28

registered retirement savings plans

1:30

work in general . The way that it works is that

1:32

when you contribute to an RRSP , you get a deduction

1:35

on the way in . A deduction means that

1:37

it reduces the amount of income you have

1:39

that can be taxed . So

1:42

if you have $100,000 of taxable

1:44

income and you make a $1,000 RRSP

1:47

contribution now , you only have to

1:49

pay taxes on $99,000

1:52

. So the RRSP contribution deducts

1:54

from your taxable income , meaning

1:56

you will pay less in taxes on the way in

1:58

. So once the money is in the RRSP

2:01

, it can be invested in

2:03

many things that you would think about stocks

2:06

, bonds , mutual funds , etfs , cash

2:08

pretty standard things that

2:10

people might have in combination inside

2:13

of an RRSP . Then , when it comes

2:15

time to take money out , you

2:17

will have to include every

2:20

dollar that you take out in your taxable income

2:22

that year . So , just like your employment

2:24

income , when you receive income , you pay taxes on

2:26

it . The RRSP will end up working the

2:28

same way . When you take the money

2:30

out , you pay taxes at that point . So you don't pay

2:32

tax on the way in , but you pay taxes on

2:34

the way out . All sorts of different ways to think about

2:36

this and calculate it , because there's so many variables

2:39

that are applicable for people with RRSP's . So

2:41

, depending on your tax rate , you could , in

2:43

theory , pay more in tax . By using an RRSP

2:45

, you could pay the same in tax or you could pay

2:47

less in tax compared to

2:49

some alternatives like using a tax-free savings

2:52

account or a non-registered account . So it

2:54

all depends on your sources of income when you

2:56

withdraw . I don't say that to

2:58

scare people , because the vast , vast , vast

3:00

majority of people will benefit from using an RRSP

3:03

, because the main benefit of an RRSP

3:05

is based on the tax deferred growth , which

3:07

is probably much more valuable than

3:09

people really give it credit for once , you start crunching

3:11

the numbers and add some realistic scenarios

3:13

to it but also the ability to

3:15

benefit from the differential in tax

3:17

rates between when you contribute and

3:20

when you withdraw . Let's use a hypothetical

3:22

example here . So say you're a high-income earner and

3:24

during your working years you might be in the top

3:26

bracket . Every bracket is different for

3:29

every province , so I'm just going to use round numbers here . Let's

3:31

call it the 50% tax bracket . But

3:34

then in retirement , for a number of reasons

3:36

and I'm going to have a whole episode on this

3:38

as to why this might be the case but it's very

3:40

likely that you are going to find yourself in

3:42

a lower tax bracket come

3:44

retirement . So you might be in the 33%

3:46

bracket when you retire . So the simple

3:49

math , which ignores time value

3:51

and potential investment , growth and whatever

3:53

, but just dollars in , dollars

3:55

out and taxes in between . Let's say

3:57

you made a $10,000 contribution . In my hypothetical

4:00

scenario , that would reduce your income by

4:02

$10,000 , which means you

4:04

would get a $5,000 refund

4:07

if you've already paid taxes on that money , which

4:09

you would have if you had employment income , like

4:11

most of you listening . Okay , so $10,000

4:13

goes in , you add a $5,000 refund

4:16

. Then later on , again ignoring

4:18

potential growth , $10,000

4:20

comes out and if you're in the 33%

4:23

tax bracket , that means you pay about $3,300

4:26

in tax . So the difference there is

4:28

the difference between $5,000 and

4:30

$3,300 , $1,700 . Maybe

4:33

this gets much better once you start to

4:35

incorporate some investment

4:37

growth over the course of your

4:39

life . But just high

4:42

level . I wanted to talk about

4:44

the main benefits there . So

4:46

if you can have that benefit of

4:48

a differential in your tax rate

4:50

, that is a great opportunity to

4:53

use an RSP . How

4:55

do you know what your tax rate is going to be in retirement

4:57

? Well , taking a look at a financial plan can help

4:59

you project that a little bit . But also

5:01

, your current tax rate is the easier one to know

5:04

, and so if you're currently in

5:06

one of the lower tax brackets in your province

5:08

and you anticipate being a good saver

5:10

over your career , it is very likely

5:13

that you would probably be in the similar tax

5:15

bracket come retirement . So this is why

5:17

I kind of have this default recommendation of

5:19

people really considering RSPs once

5:22

they're in higher than the middle tax

5:24

bracket , depending on your province . That's often

5:26

when income is over about $110,000

5:29

. But there's so many different variables it's

5:31

hard to give a blanket answer here that

5:34

is relevant for everybody . So I would encourage

5:36

you to work with a professional to find a plan that makes

5:38

sense for you if you're looking to optimize the RSP

5:40

, so talk to high level here about

5:42

how an RSP works . Let's get into the specific

5:45

strategy . That is a little bit different

5:47

. There's another type of RSP account

5:49

that you can open if you have a spouse or a common

5:51

law partner , called a spousal RSP

5:54

. What this does is it

5:56

allows you to invest money in your

5:58

spouse's name with the goal

6:00

of withdrawing it in their name and

6:03

their tax rate later . The

6:05

tax rate is the big thing , so sometimes

6:07

this shows up when there is

6:09

a primary income earner in

6:11

the household or if somebody has a pension

6:14

that they're going to have a lot of taxable money

6:16

in the future , file that under good problems

6:18

. But using a spousal RSP

6:20

helps the process of income splitting

6:22

later on in life and the benefit

6:24

there being paying less overall

6:27

in taxes . So how does

6:29

a spousal RSP work

6:32

at a high level ? Let's just work

6:34

through a hypothetical example . So you , listening

6:36

, assume you are the high income earner

6:39

in your household and your spouse

6:41

might be someone that has lower

6:43

income or no income because they might be a stay

6:45

at home parent or something like that . A spousal

6:47

RSP would be set up in your spouse's

6:50

name , but any

6:52

contributions that would go into that plan

6:54

would be based on your

6:56

tax rate and also require

6:58

you to have the RRSP

7:00

room to contribute . So

7:03

you can't borrow their RSP room and

7:05

you get the deduction or anything like that . It's

7:07

functionally the same as you

7:09

having the RSP , but the money ends up

7:11

in their name . But that is

7:13

the critical part . So how

7:15

could this strategy work best

7:18

? Before we get too far , your

7:20

wheels might already be turning and

7:22

you say , oh okay , well , if I contribute , I

7:24

get 50% deduction , my

7:27

wife doesn't work , she can take the money out

7:29

and pay no taxes , and then we can just

7:31

essentially avoid taxes on

7:33

a bunch of money every single year . Great idea

7:35

, but it doesn't work like that , okay . So

7:37

to prevent people from taking a grievous

7:40

advantage of this income splitting

7:42

opportunity using spousal RSPs

7:44

, there's a rule that says that

7:46

any income withdrawn can

7:48

be attributable back to

7:51

the contributing spouse if there's been

7:53

a contribution made this calendar year

7:55

or any of the previous

7:57

two calendar years . So think

7:59

of this just like a three-year rule

8:01

, but technically it's kind of like two years

8:03

in a day if you make the contribution at the end of December

8:06

. So the big idea here is that the money

8:08

needs to be parked in this Sposal RSP

8:10

for about three years before

8:13

it can be attributable to the other

8:16

spouse . Okay , so this takes some

8:18

planning , but for those of you in this

8:20

situation it might well be worth

8:22

it . So again , how it would work best

8:24

here . So say , there's a single income household

8:26

with a high income earner

8:28

let's call that you , okay , person

8:31

that's listening , you're the high income earner

8:33

in your household . Then you have a spouse

8:35

who doesn't earn an income and

8:37

has no intention of earning a meaningful income

8:39

over the next three years . Right , so that

8:41

gets you outside of the income attribution pocket

8:44

. Then the high income spouse has

8:46

to have RSP room because , again

8:48

, like I mentioned before , it uses their room

8:50

or your room , I guess by example

8:52

here and gives you the deduction . So

8:55

you have to have the RSP room . So then you

8:57

can open up a Sposal RSP in

8:59

the lower income earner's name . You

9:01

, as the high income earner , are the contributor

9:04

, and then you can make a contribution there

9:06

out of cash that you have on hand

9:08

that you're planning to invest for the long term

9:10

. Great , when all is said and done , you , the high

9:12

income spouse , will receive the deduction

9:14

for it , all based on your tax

9:16

rate . Once the money's in there , we kind

9:18

of sit around and wait for

9:21

the end of this calendar year and

9:23

then two more years to

9:25

pass , because at that point

9:27

now you can withdraw from the

9:29

Sposal RSP and that income

9:31

, like I mentioned at the beginning , when you

9:33

take any money out of an RSP , it

9:36

gets treated just like income . The

9:38

three year period here is critical , though , because

9:40

now that income will be attributable

9:42

to the lower income spouse or

9:44

the spouse that had this account in

9:47

their name , so it all depends on their total

9:49

income at that time . So if you withdraw

9:51

10,000 , then 10,000 will be added to their

9:53

taxable income that year . The cool thing

9:55

is , with very few high income

9:57

exceptions , everybody gets about 15

10:00

grand tax free . That amount changes

10:02

every year , but it's in that ballpark every

10:04

year . So this could be kind of the target

10:06

amount if you're looking to pay absolutely no

10:08

taxes . So let's just do the

10:11

hypothetical here again . So in theory

10:13

you could contribute in the 50%

10:15

bracket ish if you're a very high

10:17

income earner in your province and then you wait

10:20

three years after the income attribution

10:22

period of time has passed . Then

10:25

you're supposed to withdraw about $15,000

10:28

ish in the 0% bracket

10:30

. This takes my previous example of

10:32

$10,000 goes in and you get

10:34

a $5,000 refund and then $10,000

10:37

comes out but you pay virtually

10:39

no tax . Again , all depends on your situation , but

10:41

there could be a $5,000 benefit there

10:44

waiting for you on that tax

10:46

rate differential . It might sound

10:49

almost too good to be true , but

10:51

there's so many things that have to be in place for this

10:53

to actually be applicable to

10:55

your situation . But if you're planning

10:57

to use this for a long term

10:59

growth optimizing strategy

11:02

and not just some sort of three year income

11:04

splitting thing where you're just going to end up spending

11:06

all the money anyways , the idea is that you want

11:08

to keep that money invested . So you could do two things

11:11

. One , you could just leave the money in there and

11:13

not worry about the three year rule thing , necessarily

11:15

until you get closer to retirement . So

11:17

that works just fine . But if you're

11:19

wanting to take

11:21

full advantage of your TFSA as

11:23

well , if you or your spouse

11:25

have TFSA room , you could use

11:28

that withdrawal to make a TFSA

11:30

contribution . That way you

11:32

can benefit from the tax-free

11:34

growth that you have in the TFSA even

11:37

after benefiting from the tax rate

11:39

differential benefit from the RSP . The

11:42

opportunity here is pretty significant

11:44

, especially if all of those

11:46

are applicable to your situation

11:48

. So there's another thing that you could do is there's

11:50

an opportunity to use this in conjunction with the FHSA

11:53

, the first home savings account , if that's applicable

11:55

to you , meaning you haven't owned

11:57

a house as a primary residence any time

11:59

in the last four years . The main thing is because

12:01

you don't have to have RSP room

12:03

to open an FHSA , but you still get another

12:06

income deduction from it . So this is getting

12:08

into really niche territory , but it could be

12:10

a really cool planning opportunity if you

12:12

have this situation of having a

12:14

high-income earning spouse , a low-income earning

12:16

spouse , time on your hands

12:18

before you want to buy a house . You've never

12:20

owned a house before but you plan to

12:22

in the future , even if you're gonna be

12:24

a lifelong renter . The FHSA

12:27

could be a great opportunity to manage

12:30

your tax bill because you

12:32

don't need that RSP room and

12:34

if you get to the end of

12:36

the life of the FHSA 15 years later you

12:39

can transfer that back to your RSP as well . So

12:41

it's kind of like a churning opportunity

12:44

here . But that gets a little bit more complicated

12:46

. So it's just sticking with the

12:48

Sposal RSP contribution

12:51

and withdrawing three years later . A

12:53

few things I want to highlight as

12:56

reminders here . First thing again

12:58

, the contributing spouse needs

13:00

the room . So you can double check

13:03

that on your Notice of Assessment or on

13:05

your CRAMI account to

13:07

make sure that you actually have room to

13:09

contribute to a Sposal

13:11

RSP . Second thing the

13:14

income attribution rules , meaning when

13:16

can that withdrawal be counted

13:19

for the lower income spouse ? It

13:21

uses kind of a last in , first

13:23

out philosophy so

13:25

you cannot be contributing any

13:28

time during that waiting period . So

13:30

there needs to be a three-year stop on all contributions

13:32

before you can make a withdrawal

13:34

in the receiving

13:37

spouse's name and tax rate . There

13:39

is a wrinkle if you are listening

13:41

to this and you are closer to retirement and you're

13:44

considering this as part of your retirement income strategy

13:46

, if you convert your RSP to

13:49

a RIF which you have to do at age 71

13:51

, but you can do it anytime before that the

13:54

minimum amount that you have

13:56

to take out of a RIF . So again , an RSP is kind

13:58

of like a bucket . But a RIF is a bucket with a hole in it

14:00

. The hole in it is the minimum

14:02

amount that you have to withdraw every year . You can avoid

14:04

the three-year income attribution

14:07

period by just taking out the minimum amount

14:09

, and that minimum amount is

14:11

not attributed back to the

14:14

contributor . So there's some opportunities

14:16

there if you find yourself in a situation

14:18

where you accidentally made a contribution

14:20

in the last three years but still want to take

14:22

advantage of this . Again , probably

14:25

works better if you're closer to retirement , but

14:27

everything is situational . Another thing to keep

14:29

in mind your RSP room is gone

14:31

after making that withdrawal . So

14:33

this isn't like the TFSA where you

14:35

can re-contribute money that you take out of it

14:38

. No , the RSP is very different that way

14:40

. So you will

14:42

lose that RSP contribution room once

14:44

you make the withdrawal . If you have TFSA

14:47

room like I said before , tfsa or FHSA

14:49

and you want to contribute there

14:52

afterwards . That also works

14:54

great , but just know that the RSP room is gone

14:56

and you can't do this again without

14:58

earning more room along the way . Last

15:00

thing , like I said , this is the kind

15:02

of complicated version of doing

15:04

it over a three-year period of time , but

15:06

it works great as a long-term strategy . If

15:09

you are a high-income earning person

15:11

contributing to your spouse's RSP and you

15:13

both have similar amounts of RSPs

15:16

come retirement , you

15:18

can split things relatively easily , especially

15:21

before age 65 . That's a nice

15:23

thing to consider there as well . But

15:25

you just get a little bit of that less immediate

15:27

benefit and potentially less significant benefit

15:29

if you're going from the top bracket down to the zero

15:31

bracket and then into a TFSA or an FHSA

15:34

. Okay , so that is kind of the complicating

15:36

factor that you can consider here . So again

15:38

, this is not going to be something that is applicable

15:41

for everybody , but I hope you found this episode

15:43

kind of interesting , looking at some

15:45

of the unique planning opportunities that

15:47

exist out there and

15:49

things that we as financial

15:52

planners look for from time to time

15:54

, depending on someone's situation . So

15:56

let me know what you think , shoot me an email over

15:58

at podcast at evanuefieldcom . Thanks

16:00

so much for listening to this episode and

16:02

we'll see you next week with another one . Thanks

16:05

for listening to this episode of the Canadian

16:07

Money Roadmap Podcast . Any

16:09

rates of return or investments discussed are

16:12

historical or hypothetical and are

16:14

intended to be used for educational purposes

16:16

only . You should always consult

16:18

with your financial , legal and tax

16:20

advisors before making changes to your financial

16:22

plan . Evan

16:25

Neufeld is a certified financial planner and

16:27

registered investment fund advisor . Mutual

16:29

funds and ETFs are provided by Sterling

16:32

Mutuals Inc .