Should you always split your retirement income?



A. Income sharing is a strategy for shifting the income of a high-income taxpayer to a lower-income family member, with the aim of reducing the overall tax burden on the household. There are many ways to do this, but perhaps none is easier than splitting your retirement income.

By dividing the pension income, the eligible pension income can be redistributed from one spouse to another. In practice, this results in a tax deduction on line 21000 of a T1 tax return – a split pension deduction – or the higher income spouse. The recipient’s spouse applies for income to be borrowed on line 11600 for the amount of the shared pension. The result is that income is effectively shifted from one spouse to another.

Married or common law taxpayers choose to share their retirement income together when filing their tax returns. So this is a retroactive tax strategy. In this way, the distribution of the pension income can be precisely coordinated after the tax returns of both spouses have been prepared for the first time.

The eligible pension income is limited both before and after the age of 65. Before a retiree reaches age 65, the most common sources of eligible retirement income that can be shared with their spouse are defined benefit pension income (DB) and foreign taxable pension income, such as in the US Social Security. (For the full list, see Here.)

After age 65, more sources of income are eligible, including Registered Retirement Income Fund (RRIF) withdrawals. defined contribution pension (DC) Withdrawals and pension income. Note that Registered Retirement Plan (RRSP) withdrawals are not eligible. To share RRSP income with a spouse, you must convert your RRSP into a RRIF. (The full list after age 65 is Here.)

Joint pensions, like Canada Pension Plan (CPP) and Old-Age Insurance (OAS) are not entitled to a breakdown of pension income. A CPP retirement pension is entitled to a split of the pension (this is required) Submit an application to Service Canadaand you can only split the part that was earned during your relationship). Before or after the start of your benefits, you can request that your pension and that of your spouse be divided equally. This can result in more CPP benefits being paid to the spouse who did not contribute as much to the CPP. (See Here for more informations.)

Unfortunately, Individual Retirement Accounts (IRAs) for individuals with US retirement assets are not eligible for pension income sharing regardless of the age of the account holder.


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