What Happens To Your Retirement Savings During A Divorce?

What Happens To Your Retirement Savings During A Divorce?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated November 8, 2021

During the course of your marriage, you may have acquired a handful of valuable assets or invested in various investment vehicles as a couple. For instance, you and your soon-to-be ex-spouse may have been contributing to a retirement account in preparation for your Golden Years. But what happens to these assets when you split up?

Let’s take a look at retirement savings and how they may be dealt with during a divorce. 

How Are RRSPs Divided In A Divorce?

Funds from one spouse’s registered account — such as an RRSP, RESP, or TFSA — that are transferred to that of the other spouse can be rolled over tax-free as specified in a written divorce agreement or court order. The transfer must be made directly between each of the spouses’ registered plans without disqualification due to age.  

Spousal RRSP contributions can no longer be made once the couple has separated, and the 3-year minimum holding period from a prior contribution to a spouse’s RRSP will be waived. 

In terms of a TFSA, funds that are transferred from one spouse’s TFSA account to the other won’t impact the contribution room of either individual.

Can A Divorce Affect Your RRSP?

RRSPs are considered family property and are to be divided equally between both spouses in the case of separation or divorce. As per the Income Tax Act, tax-free rollovers of RRSPs between spouses are permitted where a written separation agreement or court order exists, which minimizes any tax implications. 

Should You Transfer Your RRSP Funds? Or Keep Them And Pay Your Spouse From Other Assets?

When it comes to family assets, like the matrimonial home, spouses can choose to sell the property and divide the proceeds of the sale, or one spouse can simply buy the other out and keep the asset. In the case of registered assets like RRSPs, the same question may arise: should you transfer them or buy them out and keep them? 

The answer to this question depends on your financial situation and any tax implications that you may face in terms of the use of your RRSPs. While some may choose to transfer their RRSPs to try and make room for additional contributions, others might want to use their RRSP in their matrimonial property equalization in an effort to avoid having to liquidate other assets. 

However, there could be negative tax implications for those who need to use family assets over the short term when receiving RRSPs. It’s important to consider the tax payment requirements when cashing out an RRSP, since it will become part of your income for the year that it was cashed in. 

Further, it’s important to consider the fact that RRSPs are pre-tax assets when calculating the division of the matrimonial home. These taxes should be included to minimize the overall value of the property when calculating each individual’s assets. As such, a tax can be applied to the calculation of an RRSPs value in the event of separation or divorce, especially when an RRSP is cashed in. 

Does Divorce Affect Your Canada Pension Plan (CPP)?

Any CPP contributions that spouses make during their time together can be divided equally following separation or divorce, which is referred to as “credit splitting.” Credits can be divided even if one of the partners didn’t make any CPP contributions. Credit splitting can help each partner qualify for benefits and can impact the amount of any benefits under the CPP program.

CPP credit splitting eligibility varies depending on a few factors, such as the time of separation or divorce and whether you were married or in a common-law relationship. 

A credit split is not allowed in some cases, including the following:

  • The total pensionable earnings of both partners does not exceed twice the Year’s Basic Exemption in a year
  • During the time period before one of the partners reaches the age of 18 or after a partner reaches the age of 70
  • During the time period when one of the partners was a beneficiary of a pension under the CPP or Quebec Pension Plan (QPP)
  • During the time period when one of the partners was considered disabled for the CPP or QPP disability benefit

Can Prenups Or Spousal Agreements Save Your Assets From A Divorce?

You may have heard the term “prenup” before, especially on American TV shows. But in Canada, these written contracts are actually referred to as “marriage” or “spousal” agreements. 

These agreements are designed to protect the assets of an individual in case the marriage dissolves and are usually drafted by the partner who goes into the marriage with far more assets of value than the other. In this case, the assets that the person went into the marriage with will remain that person’s property and won’t be divided with the other partner. Marriage agreements do not involve child custody.  

Each province and territory has slightly different laws when it comes to marriage or spousal agreements. There must be separate legal representation for each person in order for the contract to be considered valid, fair, and binding. 

A spousal agreement serves as somewhat of an insurance policy: hopefully, it never has to be used, but in case it does, it’s there if required. This type of agreement may be something to consider in the following situations:

  • You have a lot of net worth that you want to protect
  • There is a large discrepancy in assets between you and your partner
  • You may be receiving a large inheritance at some point in the future
  • This isn’t your first marriage 
  • There is a large discrepancy in debt levels between you and your partner

On the other hand, a spousal agreement may not be right for you in the following circumstances:

  • Neither you nor your partner have much in the way of valuable assets or debts
  • Both you and your spouse are young 

If you do choose to get a marriage agreement put in place, the cost can vary significantly and range anywhere from $500 to upwards of $10,000, depending on the complexity of the assets and debts involved. Be sure to seek legal advice if you choose to go ahead with a prenuptial or spousal agreement.  

Divorce And Retirement Fund FAQs

Will RRSP transfers to my spouse during a divorce be taxed?

Your RRSPs will be evenly divided in the event of a divorce and can be transferred to the other spouse tax-free.

Who will receive the Canada Child Benefit (CCB) payments after the divorce?

If you have children and one of you is collecting CCB payments, you can no longer combine your family income for the purpose of claiming this type of social benefit, as you will now be taxed as an individual when you divorce.  Further, any custody arrangements will determine which one of you will be able to receive these funds. If you and your partner both share custody of a child, the CRA will allow that you both share the CCB. 

What happens if I cash out my RRSP?

As mentioned earlier, cashing out your RRSP will make it become part of your income for the year that you cashed it in. Since RRSPs are pre-tax assets when calculating the division of your matrimonial home, these taxes should be included in this calculation to reduce the value of the property and therefore lower the amount you inevitably have to pay in taxes.  

Will transferring my RRSP to my spouse during a divorce affect the contribution room?

You can transfer your RRSP to your former spouse no matter what your contribution room is. 

Final Thoughts

When you divorce, you’re changing your marital status, which will inevitably impact your tax RRSPs and other retirement savings. In this case, you’ll need to update your personal information with the CRA so you can ensure that you’re reporting your taxes accurately while simultaneously taking advantage of all available tax credits and social programs.

Rating of 5/5 based on 1 vote.

Lisa has been working as a writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same. She's used a variety of financial tools over the years and is currently growing her money with Wealthsimple, while stashing some capital in a liquid high-interest savings account so that she always has a financial cushion to fall back on. She's also been avidly using her Aeroplan TD credit card to collect as many Aeroplan points as possible to put towards her travels!

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