Divorce is one of the most extreme changes that many people go through in their lives. In addition to the emotional toll — which can be substantial — a divorce brings about several practical changes that can disrupt so many established routines and expectations in people’s lives. The financial outcomes of divorce are particularly complex to navigate, and trying to find an arrangement that is fair and acceptable to all parties is often one of the most challenging pieces.
If you are going through a divorce, you likely have questions about how it will impact your finances both now and in the future. This includes a spousal RRSP account. Let’s take a closer look at how a spousal RRSP account is treated in a divorce.
What is a spousal RRSP?
An RRSP is a Registered Retirement Savings Plan, and it is an important part of many people’s retirement funding. Once an RRSP is established, it is registered by the Government of Canada. The contributions made to the RRSP each year can help reduce an individual’s tax liability as well as establish a pool of available funds to be used once the individual has reached retirement age.
A spousal RRSP refers to a plan in which a spouse or common-law partner contributes. The law allows for contributions into the RRSP until December 31 on the year the registered individual reaches 71 years of age. In addition, a spouse or common-law partner can contribute to an eligible account even if they are no longer eligible for themselves because of age. These contributions — whether made by the individual or by the spouse/common-law partner — can be deducted up to the annual deduction limit (which varies from person to person).
How is a spousal RRSP divided in a divorce?
A spousal RRSP presents a challenge for divorcing couples. When both parties have been making contributions to the RRSP, it’s logical that both will want to receive a portion of those profits. Furthermore, since a divorce can create such a financial strain, it’s possible that one or both parties will want to use the money from the RRSP before its full maturity in order to fill monetary gaps and meet their own new financial needs.
During a divorce, a full picture of a couple’s assets needs to be considered, and an RRSP is part of that total picture. There are many assets that might come into consideration:
- Joint bank accounts
- Separate bank accounts for each party
- The value of a jointly-owned home
As you can see, assets include accounts that are not necessarily mature and ready for withdrawal, so a valuation of their worth often includes projections into the future. Many times, a financial planner helps to make these assessments in order to fairly determine the estimated value.
In addition to assets, the division will also include joint debts. Credit cards, car loans, mortgages, and student loans are all considered when dividing up financial responsibilities during a divorce.
If, after all the assets and debts are assessed and considered, it is deemed fair and equitable to split the RRSP, it may require a financial planner to help determine a plan that allows the transfer of funds and the updating of beneficiaries to minimize tax liability.
How can a spousal RRSP be used for housing during a divorce?
Thanks to an update to the law in January 2020, a spousal RRSP offers some flexibility for divorcing couples. Typically, money withdrawn from an RRSP is subject to taxation, but the update has made an exception to that stipulation.
During a divorce, housing is one of the most contentious aspects for many divorcing parties. If one spouse keeps the previously shared home, the other is left with the need for adequate housing — often at a considerable expense. Meanwhile, if the previously shared home is sold with the profits split, it may not leave either party with sufficient funds to purchase a replacement home for their separate lives.
Thanks to the update, divorcing individuals are now able to make withdrawals from the RRSP without a tax penalty as long as the money withdrawn is used to purchase a residence. It’s important to note, however, that this money must be paid back within 15 years beginning two years after the initial withdrawal. In this way, the RRSP functions as a kind of loan that allows divorcing individuals to set up new living situations without incurring new debt.
Determining how to equitably split the assets between spouses or common-law partners upon a divorce can be challenging and complicated. When there are investments like spousal RRSPs to be split during a divorce, the valuation includes not only current assets but also speculation about the future. Speaking with an experienced lawyer can help you make sure you’re fully considering the impact of your assets and moving forward with divorce proceedings in a way that is fair.