Article written by Jackie Porter
You have worked hard to sock away cash for retirement for many years. It may not have occurred to you that finalizing your divorce might include parting with some or all your RSPs. If you are concerned about what will happen to your RSPs once you divorce, read on. This article addresses who will ultimately benefit from the nest egg you have built.
How are RSP Assets Treated in a Divorce?
RSP assets are considered family property in a marriage. This means your RSPs would be included in the net family property assets that will be equally divided. Other assets that are counted in family property in a divorce include the matrimonial home, registered assets such as TFSAs, RESPs, company sponsored retirement plans, and any other investments you may hold outside of your registered accounts. This includes stocks, ETF’s mutual fund or GICs. The important thing to remember is divorce is a negotiation. You can determine whether it makes sense to give up some or all your RSPs. Alternatively, you may want to hang on to some other asset that was built up during the marriage. This can be used for the purposes of making an equalization payment in your divorce.
Does this Mean my Spouse is Entitled to All of the Assets I have Built up in my RSPs?
Typically, assets you held before the marriage would still only belong to you in a divorce. This includes the assets you accumulated in your RSPs before the marriage. Unless of course your spouse can prove they have some claim on this asset. However, any gains these investments have earned since the marriage would be included in the family property calculation.
What are the Tax Implications of Turning Over My RSPs to my Spouse?
Transferring your RSPs to your spouse due to a divorce decree will not incur any tax penalties. There is a government form you and your spouse would need to fill out that allows you to transfer all or part of your RSPs to your former spouse. The form is entitled transfer due to marriage breakdown and is known as the T2220.
What if I have a Spousal RSP Can it be Transferred?
The T2220 form can also be used for RRIF and spousal RSP transfers. Keep in mind, the spousal RSP that your former spouse owns outright and which you have contributed to is now closed to new contributions. There are steps you need to take to transfer this asset. You will need to prove there haven't been any withdrawals from this account for the year you are requesting the transfer, as well as during the last 2 years.
How do I Decide if I should Transfer my RSPs to my Spouse or Pledge another Asset?
Retirement Savings Plans (RSPs) belong to a special class of assets. RSPs have tax implications associated with them on withdrawal. This means the asset cannot directly be compared to other assets without factoring in the tax implications on withdrawal. For example, to make an apples-to-apples comparison, if you keep 25,000 of TFSA assets and make an equalization payment equal to 25,000 of RSPs, is that a fair split of family property? The answer is no.
On withdrawal, the spouse who walked away with the TFSA ended up with more money in their pocket since they would receive the $25,000 tax free on withdrawal. On the other hand, the spouse who received the RSP would have to pay tax on another $25,000 of income from this asset. This reduces the amount of cash they get to keep in their pocket after tax. For this reason, it’s important for you to consider the tax implications on the assets that are being negotiated in the divorce. This will ensure you are truly giving and receiving an equal amount of the assets that were created in the marriage.
What if I Still Have Questions?
If you still have questions about what will happen to your RSPs after a divorce and you need guidance on the divorce process, feel free to reach out to the Shulman Law Team and a financial expert.