Registered Retirement Savings Plans are the main savings vehicle for many Canadians, especially those who don’t have a pension through their employment. As a result, upon separation and divorce, RRSPs are part of the property settlement.
Our guest blog this week is by Sandra Ramos, a well-known financial advisor in Barrie, Ontario. She has great advice about how to deal with RRSPs during your separation and divorce.
For most couples, separating your assets can be the most challenging event of your separation, not only from the standpoint of “equalization” but also from a “taxation point of view”. RRSP’s, Registered Retirement Savings Plans add complexity to the equalization process due to their inherent tax implications. If you remove funds from your RRSP you will pay tax on the withdrawal and the amount will be added to your income in the year of the withdrawal. You can roll your RRSPs to your spouse during the equalization process without immediate taxation, however, should your spouse use those assets to pay for legal fees or to get back on their feet financially, there will be taxes when withdrawn. This is an element that is oftentimes overlooked during negotiations simply because the current dollar value is the only information being considered and not the net after-tax effect. It is important if you are going to receive some part of your settlement in the form of an RRSP rollover from your spouse, that you tax the potential future tax implications into consideration.
For example, if your spouse has $ 10,000 in an RRSP that he or she would like to roll to you as equalization payment for other property; you must adjust for taxes. If your personal marginal tax rate annually is 20% this RRSP asset should only be viewed as $ 8,000 after tax. Receiving assets inside an RRSP can be very beneficial to the recipient when handled and evaluated properly, but it should not be viewed in the same way as cash or other property.
The involvement of a Financial Advisor or Accountant at this point in the equalization process is very important to ensure there is a thorough understanding of the taxation issues for your unique scenario. The collaborative process involves all of these elements for you, to ensure you understand the implications of the decisions you are making both from an asset valuation and forward taxation point of view.
I would love to hear some of your stories and thoughts regarding this topic and if you are interested in learning more about how I can assist you, please do not hesitate to give me a call at 1-866-949-1027 ext 235 and visit my website at www.ramoslaine.com.
Sandra Ramos, CFP
Senior Executive Consultant
Investors Group Financial Services Inc.
138 Commerce Park Drive
Barrie, Ontario L4N 8W8