A Registered Retirement Savings Plan (RRSP), or just Retirement Savings Plan (RSP), is a kind of Canadian account for keeping savings and investment assets, introduced in the late 1950s to encourage savings for retirement by employees and self-employed people. RRSPs have several advantages when it comes to tax deductions when compared to making investments outside of tax-preferred accounts. The RRSP is mostly funded from deductions from total income; hence, it reduces income tax payable for the time in a review in which the contributions are claimed. Earnings in this account are not taxed, although some withdrawals made from it would be taxed as income after withdrawal.
Meanwhile, a divorce is the legal ending of a marriage. It can be quite an ugly situation depending on the things involved; children, properties, investments, and money. It can be as nasty as the wedding was beautiful, sometimes much worse. Getting divorced does more than scatter conjugal living between the divorced couple; it also scatters their retirement plans.
Who gets to leave with what after a divorce? In the occasion of the end of a marriage, a couple’s assets are also shared. In cases when they are in the form of registered plans, dividing assets evenly and amicably can become about avoiding tax cuts. The Income Tax Act stipulates tax-free rollovers of RRSPs between divorced couples in cases where there is a written pre-nuptial agreement; this ensures there is a balancing of registered assets without unnecessary tax deductions. RRSP and pensions are considered family property and are divided 50-50 for cases of separation.
Getting back on track with RRSPs after a divorce isn’t as complex, though, but you would have to come up with a new comprehensive financial plan, this would have to reveal a person’s current economic reality and the development of an investment plan that would go well with it. It also means considering new expenses and source(s) of revenue as well as forecasting what will be needed for retirement.
A divorced partner who is entitled to regular alimony or child support payments of any kind, for example, must put into consideration that this is income that is taxable but also readily gives some room for RRSP. Ensuring that funds are set aside for tax and investment in the RRSP, as well as covering other expenses this new household would incur, is essential.
Quite many people end up with mammoth bills as a result of the divorce itself, counseling sessions for the children and credit card debt as a result of impulse spending, and for a few that get to the courts, costs like legal bills. Some people recoup these costs by cashing in on their RRSP. Worse still, some take a holiday from making deposits into their RRSP, feeling they can get back to it at any time without realizing, it gets harder to restart when retirement is staring you in the face.
Spousal RRSP is just a little different than the regular RRSPs. In the spousal RRSPs, a person uses his or her contribution room to deposit into another RRSP account in his/her spouse’s name. The person making this investment gets to benefit from the tax deduction, and the partner in whose name the RRSP is registered is the owner of the account.
In the case of a divorce, spousal RRSPs are usually handled similarly like the rest of the assets belonging to the erstwhile couple. A couple’s RRSPs are split amongst the two of them amicably and can be transferred tax-free, so in some cases contributing to a spousal RRSP isn’t entirely different from depositing into one’s RRSP.