When I add $200K in RRSP w/d to my wife's return, TT suggests optimizing our returns by splitting MY pension 50/50 thus raising her income even more. Is this a flaw?

Our 2013 returns have been tiled. I was using TT to "simulate" what would happen if my wife were to withdraw RRSP funds.  It is counterintuitive to think that increasing her income with RRSP withdrawals would trigger a suggestion for me to split my pension and therefore further increase her income and, of course, income taxes.  What gives with this?

Answer

An intriguing question!
I've done pension splitting twice now, with good results.

Firstly, not really relevant, an RRSP withdrawal is not eligible for pension splitting.

Secondly, a lot depends on how much withholding tax you figured into your wife's RRSP withdrawal. It would have to be at the highest marginal rate for your province.

Pension splitting aims to minimize tax payable. In a pension split, not only does income change hands, but the amount of tax paid goes with it.

Turbotax software is seeing the huge amount of unpaid tax on your wife's RRSP withdrawal and attempting to compensate for thatby moving your taxed pension amounts .

If you did not factor in any tax witheld into RRSP, the split algorithm will try to move any eligible income that has been taxed.
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