How to Divide Retirement Assets During Divorce
Equalizing Taxable Assets Can Be Difficult
If you are considering separation or divorce, you need to think about how you and your partner will divide assets such as Registered Retirement Savings Plans, Locked-In Retirement Accounts, and pensions. This process can be extremely difficult to navigate. This is especially true if one party has been primarily responsible for overseeing finances throughout the relationship. Our skilled team of lawyers break down the strategies for dividing assets when a marriage ends.
How Taxes Impact Dividing Assets
There are two categories of assets to equalize: retirement or taxable assets, and non-retirement or after-tax assets. RRSPs, LIRA accounts and pensions fall into the former category, while everything else falls into the latter category. One of the main reasons there are two categories is because retirement assets have an embedded tax component in their value, while this is not generally true for the non-retirement assets. You cannot compare a $100,000 RRSP with $100,000 of equity in a family home, because the cash in the family home does not attract taxes when the home is sold, whereas you pay taxes on the withdrawal of the RRSP. In order to compare “apples and apples”, you would need to tax discount the RRSP by the amount of the anticipated taxes which would be payable on liquidation. For example, assuming a tax rate of 30%, the $100,000 RRSP would only have a value of $70,000 on an after-tax basis, compared to the $100,00 value of equity in the family home.
How to Ensure Divisions Are Equal
If you agree to receive an equalization payment as an RRSP rollover, as opposed to a cash payment, you are not receiving an equal division of the assets and debts. This is because the RRSP rollover should be paid in after-tax cash instead of before-tax RRSP funds. The difference is the notional tax discount relating to the RRSP rollover amount. In order to equalize this underpayment of what you would otherwise be entitled to receive you could make an adjustment in relation to your pension. Again, because this is a pre-tax amount (taxes will be paid when the funds are withdrawn) the value of the pension value needs to be tax discounted.
How to Value a Pension
It’s important to note that there are two types of pensions: defined benefits and defined contribution. Defined benefit is the type that would need to be valued, while defined contribution is more like an RRSP. An actuary is considered to be the best evidence of the current value on a pension. However, it’s possible to get a statement from a pension administrator regarding the value of a pension upon the breakdown of a marriage, which can be helpful but may not be as accurate. The cost of an actuary valuation is generally $500.00 or less.
Disclaimer: The content provided in the blog posts of Jones Divorce & Family Law is general information and should not be considered legal advice. Please contact a lawyer for legal advice tailored to your specific situation. All articles are current as of their original publication date.