But spousal RRSPs have different rules
Q: Last year, I separated from my husband. My two children live with me. My ex has not been consistent with his support payments and I am constantly short of money every month. Can I withdraw my RRSPs? Some are in my name and others in a spousal RRSP. Who gets taxed on the withdrawals?
A: Withdrawals from a taxpayer’s Registered Retirement Savings Plan (RRSP) are taxed as income by the taxpayer in the year of the withdrawal. Withdrawals from your RRSPs are taxed in your hands. You can maximize withdrawals waiting for low-income earning years and checking the income thresholds to time your withdrawals to minimize your tax liability.
Spousal RRSPs are subject to additional rules. The contributor to a spousal RRSP may deduct the contributions, but the spouse is the annuitant and beneficiary. Generally, withdrawals of a spousal RRSP contributed in the past three years must be reported as income by the contributor, not the annuitant. After the three-year waiting period, all withdrawals are taxed and reported by the recipient. However, spousal RRSP withdrawals made at the time of a marriage breakdown or a couple living separately, fall on the recipient to report the income and pay the tax.
Q: I am 64 years old. At what age may I continue to contribute to my RRSPs? Must I pay tax on the entire RRSP portfolio at that time?
A: You may contribute to your RRSP to age 69 years young. Your RRSPs must be collapsed on or before Dec. 31 in the year of your 69th birthday.
At this point, you would have three choices:
- Withdraw the entire RRSP portfolio. Not the best option, as you must report the entire portfolio as income and will inherit a huge tax liability.
- Rollover into a Registered Retirement Income Fund (RRIF). It’s a popular option for many seniors.
- Rollover into an Annuity. Great for seniors that need a fixed steady income cash flow. Consult your tax/financial planner for more details.
However, provided you have the contribution room and your spouse is under 70 years old, contributions can continue to a spousal RRSP.
All contributions must cease after your spouse’s 69th birthday.
Henry Choo Chong, CGA, provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304.