Reader Question:Do I Have To Share My RRSP With My Spouse When I Get Divorced?

Another reader of the Canadian Budget Binder blog asked the question, Do I have to Share my RRSP with my Spouse When I get Divorced”?

In Ontario there is the Family Law Act. In simple terms all property acquired after the date of marriage, up until the time of marriage breakdown is deemed to be the property of both parties. The ownership of the property is not a factor. So in short each person is entitled to 50% of the total family property.

There are certain exceptions like the family home that was brought into the relationship or received as a gift or inheritance. However to keep things simple we will ignore this.

RRSP’s, Stocks, Bonds, Pensions, are all subject to being included under Family Law. So if one spouse had a significant RRSP and the other nothing then the spouse with nothing would be entitled to 50% of the spouse’s RRSP.

Note: the courts adjust the value of the RRSP down, by the amount of withholding tax that would be payable if the RRSP were cashed in. So the figure used is less than fair market value of the RRSP.

To understand this fully the courts ask each person for a statement of assets and liabilities at time of marriage and time of marriage breakdown.

In effect they are doing a net worth statement at two points in time. This is known as net family property (NFP) and the spouse with the RRSP would include it as part of their NFP.

The spouse with the higher NFP would then be required to make an equalization payment to the other spouse so that both share 50-50.

This payment does not have to come from the RRSP or a transfer of the RRSP to settle the payment obligations. It can actually come from any assets owned by the individual with the higher NFP.

Hopefully this gives you some insight on your question about an RRSP and Divorce. To learn more about Family Law, Division of Assets and calculation equalization payments visit Feldstein Family Law Group .

Every attempt has been made to be accurate but Errors and Omissions Excepted.

Have you been through this experience? What did you learn?-Mr.CBB

 Gary Gorr

Guest Post: About Gary Gorr: What kind of written plan do you have for retirement that ensures you won’t outlive your money? I help people answer that question Contact Information: (905) 202-8430 ext.626 ggorr@ifcg.com or you can follow my blog at Gary’s $$$ and Sense 

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Reader Question:Is It Savvy To Cash In My RRSP’s To Pay Off Debt?

A Reader Question about whether it was savvy to cash in an RRSP to pay off Debt was submitted to Canadian Budget Binders Ask Mr.CBB. He forwarded it to me to share my opinion on this topic with all of you.

My short answer is that it depends.

There are several factors to consider:

  • The age of the person
  • The withholding tax on the funds withdrawn on the RRSP
  • The amount of debt and its’ interest rate
  • The type of investment held in the RRSP
  • The opportunity cost of the withdrawal

To keep things simple let me say if you are doing this and are under 30 then it might not be a bad thing. At older ages you have a shorter accumulation period and time and the magic of compound interest work against you.

I have always maintained that paying off debt is one of the best investments someone can make.

Let’s say you’re carrying a credit-card balance of $1,000 with 18 percent simple annual interest. That’s $180 a year in charges. Pay off that debt and you’ve saved $180. That’s the same as investing $1,000 in something that earns an 18 percent return after tax.

Tax Withholding Rates

When you withdraw funds from an RRSP there is a tax withholding. This is a credit due for taxes payable on 100% of the withdrawal and is to be paid by April 30th in the year following the withdrawal. You may indeed owe more than the rate withheld if you have a high income.

Withdrawal Amount Tax Withholding
From $0 to $5,000 10%
From $5,001 to $15,000 20%
Greater than $15,000 30%

So let’s assume you have $10,000 in debt. You are paying the minimum of 3% per month to carry the debt or $300 per month. The debt carries an interest rate of 18%.

Approximately $14,300 needs to be withdrawn to net the $10,000 to pay off the debt. Your savings, the cash flow of $300 per month after the debt is eliminated.

However the real cost may be much greater.

What would the $14,300 be worth at age 65 at 6% yield if it had never been withdrawn?

If you were 35 when you did this, the monies would be worth at 65, $83,281 so you are giving up potential growth on this money in addition to the withholding tax.

Ok, I hear the question already: What if we withdraw, pay off the debt, and invest the $300 a month every month to age 65?

If you indeed did do this, your deposits would be worth $294,354. In this example provided you have the discipline to save the $300/mo. it indeed might work out to eliminate the debt first.

What if our client was able to find savings through budgeting etc. and find an additional $300 per month?

In 19 months he/she would be debt free, their RRSP would be intact, and now they can save even more toward their future.

This Calculator is a handy tool. First enter $10,000, then 18%, then monthly payment of $300.

Under step 2, choose minimum payments. This shows the real cost of paying credit cards on a minimum payment basis.

On page 2, change the monthly payment to $600. See the result? You may want to bookmark this calculator.

Ideally this would be the preferred course of action.

If your RRSP’s are earning low rates of return, such as 2% or 3% it makes it easier to withdraw monies and eliminate the debt.

Your opportunity cost (Put another way, the benefits you could have received by taking an alternative action.) is not very great because of the low yield on the investment.

So there you have my analysis on whether you should cash in your RRSP’s to Pay Off Debt!

What is your opinion?

Would you pay off the debt first?

Look for the savings through budgeting and keep the RRSP intact?

Comments and opinions are welcomed below.

Gary B. Gorr, CHFC

About Gary Gorr: What kind of written plan do you have for retirement that ensures you won’t outlive your money? I help people answer that question CONTACT INFORMATION: (905) 202-8430 ext.626 ggorr@ifcg.com or you can follow my blog at Gary’s $$$ and Sense 

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Reader Question: RRSP’s-The Need To Know Basics

RRSP’s-The Need to Know Basics

Reader Question: I want to save for retirement. Where is the best place to save for this? I have been told NOT to use RRSP. Can you help?

Saving for retirement is a good thing and RRSP’s (Registered Retirement Savings Plans) are a popular tool for doing so.

I don’t know the client’s age or his/her income so this answer is predicated on the fact that the client has several months of income in an emergency fund.  An emergency fund is a base component of proper planning and should be done before making any RRSP contributions.

Also, it assumes the client is making more than $40,000 in income per year, as incomes under $40,000 don’t benefit much from tax savings on RRSP contributions.

Below I will try to define some of the Basics of RRSP’s and also illustrate some of the long-term advantages.

When Did RRSP’s Begin?

RRSP’s first came into existence in 1957 as a government supported effort to help Canadians save for their retirement.

Types of RRSP’s

There are broadly speaking three main types of RRSP’s

  1. Individual RRSP-where the contribution is made in your name and held in your name.
  2. Spousal RRSP- The contribution is made by you, deducted by you, but held in the name of your spouse.

This strategy would be employed when you are the higher income earner now and likely in retirement. The payout would be taxed in spouse’s hands and result in less tax payable.

  1. A Group RRSP-The contributions are payroll deducted and forwarded to the investment manager of the group RRSP and invested as per your directions in your individual account.

One key difference is that tax savings can be realized immediately if documented properly rather than waiting until the end of the tax year.

How Much Can I Invest?

You Can Invest 18% of prior years “earned income” minus any pension adjustments (P.A) up to a yearly maximum. Contributions made to a Pension Plan where you work, by you and your employer would be an example of a P.A. and would reduce your RRSP contribution amount. The maximum for 2012 is $23,280. This maximum will be indexed annually by the annual increase in the average wage.

Canada Revenue shows how much you can contribute annually on your Notice of Assessment.

What if I can’t contribute the maximum I am allowed?

Good news! The unused amount not claimed is carried forward and never lost. CRA keeps track and shows the unused amount that can be claimed in future years, either in whole or in part, on your Notice of Assessment and is not limited to 18% of your current income.

What Kind of Investments Can I have in my RRSP?

People often say I am going to buy an RRSP as if it were itself an investment. It is just a holding vehicle for certain types of investments.

Some of the most common types are:

  • Cash
  • Guaranteed Investment Certificates (GIC’s)
  • Savings Bonds
  • Treasury Bills
  • Bonds
  • Mutual Funds
  • ETFs (Exchange Traded Funds)
  • Canadian Mortgages
  • Equities
  • Income Trusts

The type you choose for your RRSP depends upon many things. One should consider your level of risk, your investment time horizon and the return you might require to achieve your financial objectives for retirement.

A good planner can help you build a retirement plan for you and answer these questions and help decide the right investments for you.

The Main Advantages of RRSP’s

  1. Contributions are tax deductible, resulting in less current taxable income
  2. Investment earnings grow on a tax deferred basis

How important is the tax deferral aspect of RRSP’s?

To see how important it is let us compare a 35 year old saving $7,000 per year into an RRSP versus the same $7,000 being saved in a taxable investment and being taxed annually at 40%, both investments earning 7%.

After 30 years the Registered Investment has a value of $707,511. The non-registered investment is worth $423,022. Every year the non-registered investment was worth less, as 40% of the investment earnings were lost to taxes.

Granted the registered investment has had zero taxation in the accumulation period, this is the real magic of tax -sheltered growth, and will be subject to taxes when income is withdrawn.  Usually in retirement most Canadians will be in a lower tax bracket than during their peak earning years and the income will be taxed at a lower tax rate.

Even if we assume the client took the money in 1 lump sum at 65, not likely or recommended, and paid tax at 40%, the net after taxes would be $424,507, effectively the same as the non-registered plan.

What if the Investor Reinvested their Tax Savings every year?

This has a profound impact on the size of your accumulation! The tax savings on a $7,000 deposit produces an annual refund of $2,800 ($7,000 times 40%). If this were invested outside an RRSP it would produce an additional $169,209 of capital. The combined capital total at 65 would be $876,720.

All investors should seriously think about reinvesting the tax savings to magnify the accumulation.

The Benefits of Starting Early

If the client waits five years to begin investing and starts at 40 versus 35, he/she will accumulate only $598,567 (assuming he/she reinvests tax saving). A significant difference and proves the old axiom that starting early has significant advantages.

Your RRSP is Not an Emergency Fund 

Yes, investors can withdraw funds from their RRSP and sometimes do, but seriously the consequences are more severe than you might imagine.

If you withdraw there is a withholding tax levied and is based upon the size of the withdrawal. This is applied to income tax owing, as the withdrawal is 100% added to other income in the year of withdrawal

Withholding Tax Rates on Withdrawals
Withdrawal Amount Rate
0 to $5000

10%

$5,001 to $15,000

20%

$15,000 and over

30%

The real cost is the long-term cost.

A male age 35, investing 7,000 per year at 7%, and wanting to retire at age 65 and currently has $50,000 of accrued RRSP savings. After 10 years he withdraws $25,000 to deal with a critical illness. What impact will this have on his future savings?

Impact of a withdrawal from RRSP Withdrawal Calculator The result is very significant as you can see.

To answer the final piece of this investor’s question where he/she has been advised not to use RRSP’s. I find there are few circumstances where an RRSP doesn’t make sense.

However low-income Canadians, or Canadians with expensive debt, or those without an emergency fund would be advised to tackle debt first, build an emergency fund, before investing in an RRSP.

This is not a comprehensive overview of RRSP’s but focuses on the Need to Know information. Every attempt has been made to be accurate but Errors and Omissions are Excepted (E&OE)

Now that your literacy has improved the next step is to find an advisor to help you begin the process of retirement planning.

Do you have RRSP’s and how old were you when you started to invest? – Mr.CBB

About Gary Gorr

I am an investment advisor employing behavioral finance principles in my advice giving and a licensed life insurance broker with 36 years of experience helping Canadians achieve financial security. CONTACT INFORMATION: (905) 202-8430 ext.626 ggorr@ifcg.com

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