Pension income splitting: your RRSP becomes eligible at 65, RRIF income anytime

Your RRSP withdrawals can't be split with your spouse for tax purposes. But convert that RRSP to a RRIF, and suddenly that income becomes eligible for pension splitting - as long as you're 65 or older.

This creates a narrow window between ages 65 and 71 where you can choose. Keep the RRSP and pay full tax on withdrawals, or convert to a RRIF and split that income 50/50 with your spouse. The math usually favours the RRIF conversion.

How pension income splitting works

Pension income splitting lets you allocate up to 50% of eligible pension income to your spouse for tax purposes. You don't actually transfer the money - it stays in your account. But on your tax returns, you can show that income under your spouse's name instead of yours.

The goal is to even out your marginal tax rates. If you're earning $90k and your spouse earns $40k, shifting $25k from your return to theirs can save substantial tax. You drop from a higher marginal rate, they pick up the income at a lower rate.

But not all retirement income qualifies. CPP and OAS can't be split. Neither can regular RRSP withdrawals. RRIF payments can be split - but only after you turn 65.

The RRSP-to-RRIF decision

You must convert your RRSP to a RRIF by December 31st of the year you turn 71. But you can convert earlier, anytime after 65, to unlock pension splitting.

Here's the trade-off: RRIF accounts have mandatory minimum withdrawals each year. At 65, you must withdraw 4% of the account value. At 70, it's 5%. These minimums increase with age, and you can't put the money back.

With an RRSP, you control when and how much you withdraw until 71. But every dollar comes out at your full marginal rate - no splitting allowed.

The break-even calculation depends on the tax savings from splitting versus the cost of forced withdrawals you might not need. TaxSplit.ca can model this for your specific income levels and province.

The spousal RRSP wrinkle

If you have a spousal RRSP - an RRSP you contributed to in your spouse's name - different rules apply. Your spouse owns this account and controls the withdrawals. When they convert it to a RRIF, they can split that income with you, but only if they're 65 or older.

This is where the planning gets interesting. If you're 67 and your spouse is 62, you could convert your regular RRSP to a RRIF and split that income with them. But they can't split their spousal RRIF income with you until they hit 65.

Provincial math matters

Pension income splitting works best when there's a significant gap between spouses' income levels. In Ontario at $90k versus $40k, shifting $20k could save around $3,200 annually. In Alberta, slightly less. In Quebec, potentially more.

The higher your combined income and the bigger the gap between you, the more pension splitting saves. If both spouses are already in similar marginal tax brackets, the benefit shrinks.

The catch is that RRIF minimums are based on your age, not your financial need. Converting early to access pension splitting means accepting those mandatory withdrawals whether you want to spend the money or not. Sometimes the forced withdrawal pushes you into a higher tax bracket, undoing part of the splitting benefit.

If you're 67 with substantial RRSP savings and a spouse in a lower tax bracket, the RRIF conversion usually makes sense. The splitting benefit typically outweighs the cost of minimum withdrawals - at least for the first few years.