How do I reduce taxes now that my spouse has died and income splitting is not an option?
Q. I am recently widowed and heading into retirement. My husband and I accumulated a significant value in registered retirement savings plans (RRSPs), and had done our financial planning based on our ability to income split once we had to convert the RRSPs to registered retirement income funds (RRIFs.) Now, that window is closed for me. Any suggestions on how to avoid this increased tax burden?
FP Answers: I’m sorry to hear about your husband, Lorraine. I suspect, like most people, when you and your husband were planning your future you visualized yourselves in good health enjoying an active lifestyle. For you, this pointed to a strategy involving large RRSP contributions to get the tax deductions, tax-free compounding and pension splitting on a long withdrawal schedule to age 90 or beyond. Unfortunately, your plans didn’t go as expected and you can no longer pension split.
To understand the significance of no pension splitting for widowers, divorcees, and single seniors I will use the following example. Let’s assume you want a taxable income of $150,000 a year and you are both receiving maximum age 65 Canada Pension Plan (CPP) and Old Age Security (OAS). You would have to draw about $50,000 each from your RRIFs to have an after-tax income of $122,540, and there would be no OAS clawback.
As a single, if you draw $100,000 from your RRIF, rather than $50,000 each as a couple would, you would be left with an after-tax income of $90,274. That is $32,266 less than a couple over age 65 drawing the same income. That’s a big difference, but remember your husband’s OAS stopped, and more than half of yours is clawed back, and because you both received the maximum CPP there is no survivor’s pension.
Let me make your situation even
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