Use of the spousal RRSP is a no-brainer in your case … there really is no downside to using it … the strategy of cycling money through a spousal RRSP and back out again is valid in some cases, but is just a little too popular for its own good, and many people wind up harming themselves by doing it … however, it could be a very good plan in your circumstances, with a few caveats & clarifications …
jgcpalmer said:
The first few thousand withdrawn would be pretty much completely tax free as she makes less than the basic personal exemption.
As RussT already pointed out, the notion of “tax-free” withdrawals in the spouse’s hands is mostly a myth … the impact on the spousal amount tax credit on your return ensures that a withdrawal will always be taxed, unless both of you are simultaneously below the basic personal amount threshold. Nuff said, Russ covered it.
jgcpalmer said:
From everything I’ve read you have to wait 3 years from the last contribution to not get penalized.
It is often described that way, but that’s not quite right … it could be as much as 3 years, or it could be as little as 2 years plus a few days … the actual rule is that attribution applies only to the extent that you have made a spousal contribution in the same calendar year (as the withdrawal), or either of the two prior calendar years … therefore, a spousal contribution made in December 2021 is treated no differently, in the attribution rules, than a spousal contribution made in January 2021 … either way, as long as that is the final spousal contribution, the annuitant-spouse would be free and clear to withdraw sans attribution as of January 1, 2024.
jgcpalmer said:
I’m not concerned for the loss of contribution room.
You should be … this kind of plan backfires on a lot of people … since you don’t appear to have a DBP, the RRSP is by far the most valuable tool available to you, to secure a comfortable retirement. Don’t dismiss it lightly.
jgcpalmer said:
The point of RRSPs is to defer and lower tax payments, so if this plan lowers it even more, then these RRSPs will have done their job.
Lowering tax payments is not the point of RRSPs … they are meant to provide a tax-efficient means of funding retirement and they do that by making you wealthier than you otherwise would have been, not by lowering your tax bill … wealthier people often pay more tax than their less-wealthy neighbors … this belief that tax payments must be “lower” in order to benefit from RRSP is common, but it is a myth.
jgcpalmer said:
We could then be reinvesting that money and/or using it to support her costs at that time, which would likely include long-term care or some sort of in-home nursing support.
To the extent that you are using the money withdrawn for spending, whether to cover the additional health care costs, or to fund one last blow-out vacation together, it is almost certainly a sound plan … reinvestment, though, is a far less compelling choice
jgcpalmer said:
assuming we did not have an immediate need for the money we could reinvest in a TFSA or a non-registered investment and it would still save a lot of tax compared to if I just had it in my own RRSPs.
Reinvesting withdrawals into TFSA is valid, if that is the only way the TFSA can be funded … but drawing from RRSP to reinvest in a non-reg account, not so much … you might start out ahead, by having withdrawn at a rate lower than your marginal rate at contribution … but that lead will be eroded by the ongoing inefficiency of the non-reg investments, and the more time that passes, the greater the erosion … non-reg investment rarely outperforms RRSP investment, over any reasonably lengthy period of time.
jgcpalmer said:
What percentage of my RRSPs should I be contributing into her account?
I don’t think it matters much … you want to have enough to support additional health-care spending in her final years, but anything beyond that will revert back to you anyway … start with an equal split and adjust as you see fit, going forward.
jgcpalmer said:
Was reading about OAS clawback earlier today
Its good to be aware of it, but its not really much of a factor … IF you end up among the 3% of highest-earning seniors (97% of seniors don’t) then a clawback might make the RRSP less beneficial than it otherwise would have been, but it is quite rare that it flips the RRSP from beneficial to non-beneficial.
jgcpalmer said:
Actually, any other financial advice for our situation?
One thought comes to mind … actually its not unique to your situation but applies to all married couples with substantial assets … make sure her TFSA is fully funded at all times … as you’ve noted, all opportunities for income splitting will cease after she’s gone … the entire portfolio will revert to you, along with the full tax burden of that portfolio … and any unused TFSA contribution room she has left when she passes is lost, so you want that account to be maxed at all times. Don’t be tempted to use it to support her care costs … the spousal RRSP would be much better suited for that purpose.