How pension splitting reduces taxes in Canada
- January 17, 2023
If you’re a couple, pension splitting may be one of the best ways to get around paying taxes when you retire. The concept is simple: You and your spouse each take some or all of your retirement income as a lump sum, which can be invested differently, and then use those funds to buy an annuity that pays income for life. The result? Two people’s retirement incomes will often be more than what they could have afforded on their own.
What is pension splitting?
Pension splitting is a way to share retirement income between spouses. It reduces your tax bill by letting you split pension income between spouses, which can be done if one of you has a pension plan and the other does not.
The concept behind pension splitting is simple: if one spouse owns an account that earns interest or dividends (such as RRSPs), then that spouse can withdraw from it to pay for their own needs while maintaining control over how much money is withdrawn each year without any additional restrictions on how much money can be withdrawn at any time.
How does pension splitting work?
When you split your pension, the money goes to each partner’s benefit plan in their name. You can have it paid directly into a joint account or separate accounts.
If you’re married and filing jointly, the amount of pension splitting will depend on how much money each spouse has saved in their plan. Suppose one spouse has more than $5,000 saved and another has less than $5,000 saved at the time of separation (or divorce). In that case, they will receive 100% of their contributions and any earnings from those savings until they have accumulated enough funds for themself alone. At that point, they must start contributing again so that both parties can access their funds simultaneously!
When must you split your pension income?
The first thing to know is that you must split your pension income if you and your spouse are living together. This includes common-law couples, married or cohabiting partners, divorced or separated people, and those with children under 18. If you don’t meet these criteria but would like to take advantage of this tax benefit anyway, or if someone else qualifies, you can still split their pension income by means of an election.
What are the benefits of pension splitting?
- Reduces tax burden
- Helps couples to retire at the same time
- Helps couples to retire sooner
- Helps couples to retire in comfort and style
What are the drawbacks of pension splitting?
- It would help if you were married or in a common-law relationship.
- You must have a spouse who is 65 or older.
- You must be the same age or older than your spouse and receive a pension from the federal government, provincial governments, public transit authorities (such as GO Transit), Canada Pension Plan (CPP), or Employment Insurance (EI).
Pension splitting lets couples share their retirement incomes.
Pension splitting is a tax-saving strategy that allows you to split up to 50% of the pension income you receive with your spouse or common-law partner. You can split your pension income for the year you turn 65 or later as long as one spouse is still working and receiving a pension.
Pension splitting is a great option for couples who want to share their pension income. It’s the best way to ensure that both of you can retire with dignity and financial security. However, it also has drawbacks, especially when one spouse needs to earn more money from work to cover all of their retirement expenses.