Splitting can help you retire earlier

National Post

2007-10-20



Boomers may have a new tax opportunity available to them this year. The ability to split pension income with a spouse or common-law partner was passed into law in June, and will be effective for 2007.

This tax-planning technique may provide the incentive needed for Boomers to seriously consider early retirement.

Given the right set of circumstances, they may be ahead of the game on an aftertax basis due to the substantial tax savings available.

Income that qualifies for splitting is the same income that currently qualifies for the $2,000 pension income credit. Since Boomers are under age 65, generally the only source of pension income that qualifies will be money drawn from an employer-sponsored Defined Benefit plan.

By choosing to retire at age 55, for example, which is available under the terms of some pension plans, and electing to draw a pension, the recipient would be in a position to allocate up to half that income to his or her spouse or partner.

If the spouse or partner is in a lower tax bracket than the pensioner, the tax savings can be substantial.

In addition, the spouse or partner could claim the $2,000 pension income credit for further tax savings.

Boomer couples who think they may benefit from such a plan should sit down with an advisor or tax accountant and do the math to determine whether early retirement might make financial sense.

And remember, just because you've elected to receive an early pension does not mean you can't seek future employment to supplement your pension income.

What if you don't participate in a Defined Benefit plan but save for your retirement through an RRSP?

In that case, you're out of luck as you can't split your registered savings with a spouse or partner until you're at least 65 years old.

In an attempt to respond to complaints about this inequity, the government stated: "Without the age-65 eligibility rule, many individuals who are not retired could gain significant tax advantages well before they attain age 65 by arranging to withdraw money each year as RRSP annuity or RRIF income while still saving for retirement.

"Individuals in receipt of RPP income, on the other hand, generally have little control over the timing of their pension payments -- they usually only receive such payments when they are retired."

Clearly, the law discriminates against Boomers who wish to retire early but are not members of Defined Benefit plans.

For the legions of these people, the prior use of spousal RRSPs may provide the tax savings needed to justify early retirement -- or savings roughly equivalent to what would have been available through the new pension splitting rules.