Splitting RRSPs – just one piece of the larger divorce puzzle
Focusing on age and tax implications, the article looks at how retirement accounts can be split during divorce.
For those divorcing later in life, retirement accounts will be central during divorce
Deciding how to split assets is one of the most important – and often among the most complicated – aspects of many divorces. For people who are divorcing later in life, dividing marital property will be an especially central concern if they are to enjoy a comfortable retirement. In such divorces, as the Financial Post points out, it is necessary for both parties to consider their entire financial portfolio and how it lines up with their retirement goals. Splitting RRSPs and pensions, for example, will be a major topic for many divorcing couples, but how such assets are split will depend on the unique circumstances of each divorce.
Funding the retirement
For people who are planning on retiring within a few years after their divorce, it is important to keep in mind how those remaining years of work will impact the assets they receive in their divorce settlement. If, for example, an RRSP is split 50-50, that could leave one or both former spouses with only half of a significant retirement asset that they were otherwise relying on for their future plans – and with little time left to replenish it. The same, of course, holds true of pensions and other investments that a person may be counting on for his or her retirement.
As the Globe and Mail points out, people going through a divorce need to decide whether they simply want to split all of their assets 50-50 or if they want to negotiate who gets which assets in order to come to a roughly fair settlement. While the former choice may seem the simplest, the latter option may prove more beneficial in some cases. For example, splitting all assets down the middle would require that the family home be sold off and the value be divided between both parties. A popular alternative is for one spouse to keep the house in exchange for the other spouse keeping the RRSPs and pensions. Such an option needs to be carefully considered, however, since in many situations the cost of maintaining a home can make what otherwise looks like a fair settlement overly lopsided in the long term.
Taxes and cash
Among the most important concerns when deciding on who gets an RRSP are taxes. Dividing or transferring an RRSP account will not result in a tax penalty, which can prove highly beneficial to the party that ultimately ends up with the bulk of the couple’s RRSPs. However, it is just as important to keep in mind that money that is withdrawn from an RRSP is taxable. While it is important to plan for the future, making sure that a settlement leaves one with some immediate cash on hand can be just as important.
Understanding how property gets divided during a divorce and what a fair settlement actually looks like is difficult for most people. Having skilled legal advice on hand is often a key factor in ensuring one’s best interests are protected during a divorce. An experienced family lawyer can help those who are preparing for or in the middle of a divorce make sense of what is often an otherwise confusing and overwhelming situation.