The Joy Of An Ex - Retirement Assets: Not All Things Are Created Equal!

When it comes to deciding on property division of retirement assets, it may be wiser to consider each property's after tax result and any possible extra rules that may complicate or reduce your take home portion.

One of the biggest causes of friction between couples is the division of pension assets. Pension legislation determines conversion and withdrawals from pensions or Locked-in Retirement Accounts (LIRA).

There are differences between RRSPs and pensions. For example, look at the following two equal amounts, a $300,000 LIRA and a $300,000 Registered Savings Plan (RSP). Think of both as savings programs that allow the investments inside them to grow without paying taxes on the growth. The catch is that the government wants its taxes at some point. That means that you need to convert from a savings program to a withdrawal program.

The LIRA must be converted to a Life Income Fund (LIF) and will then be subject to very strict guidelines for withdrawing funds. The formula takes into account the value of the portfolio on December 31st of the previous year, your age, and other factors before arriving at two sets of dollar amounts - a minimum and a maximum. Your withdrawals have to stay within those two amounts. YOU CAN NOT TAKE MORE OR LESS! The money in these programs is pension money and therefore designed to last until age 90. There are only two exceptions - extreme hardship and having a terminal disease with an expectation of living less than two years. Most divorces are not considered a hardship!

You can start withdrawing funds at anytime whether in an RSP or RRIF. The LIRA does not allow withdrawals; it must be converted to LIF and no earlier than age 55. What if you don't need the money right away? In both cases, age 69 is the magic age when it is mandatory to start a program.

The RRSP has more options. You can cash it all in, convert it into an annuity or convert it to a Registered Retirement Income Fund (RRIF). Unlike the LIRA/LIF you may take any amount you want out of either the RRSP or a RRIF. You simply pay the taxes on withdrawals. The taxes payable are based on the marginal tax rate of the plan owner.

Please do not confuse the mandatory withholding tax with the year-end taxes you pay by the April 30th deadline. The withholding tax is simply a prepayment to the tax department.

In our example using $300,000, the amount coming out of a LIF may be anywhere from $12,000 to $20,000 maximum. If the same amount were in an RRSP or RRIF you could cash out completely. You must simply pay Revenue Canada its share, whether that share is $60,000 or $140,000.

Other contentious issues may develop depending on these often challenging "other" assets

- second or rental properties such as cottages and investment real estate

- business assets

- registered versus non-registered investments

- long term single stock holdings

The intent of this chapter is to make sure that you look beyond the basic numbers. This just might be the case of "what you see is not what you get."