Do you know the benefits of a spousal RRSP?

Publish date September 14, 2018

A young couple smiles as they look at documents for their spousal RRSP.

You may be familiar with a registered retirement savings plan (RRSP) and how it can help you save money for your retirement. But how much do you know about the spousal RRSP?

A spousal RRSP allows you to “split” your retirement income and pay less tax as a couple over the course of your lifetimes.

Why get a spousal RRSP?

A spousal RRSP is a retirement savings tool that a married or common-law couple can use to save for retirement and lower their tax burden. It lets couples split their income after they retire, which lightens the tax load. The goal of the plan is to equalize retirement savings between two partners. This way, when you retire, you’ll each be withdrawing a similar amount of money from your RRSPs.

There are many ways a spousal RRSP could benefit you and your family. Maybe one spouse earns a big income and enjoys an employer-sponsored pension, while the other spouse stays at home. Or perhaps one spouse takes time off from their professional career and focuses on raising a family. Possibly one partner wants to return to school or can’t work due to an illness. Or maybe both you and your partner work but earn very different salaries.

How does it work?

Typically, a spousal RRSP is used as follows: the spouse with higher income opens and contributes to a spousal RRSP on behalf of his/her partner.

Imagine that one spouse earned much more over the course of a career and contributed a lot more to his/her RRSP. When that spouse retires, the nest egg will be bigger than the partner’s. If both withdraw the same percentage from their savings, the spouse
with more saved may pay taxes at a higher rate in retirement. This could mean a higher overall tax bill during your retirement years.

Here is a hypothetical example of a married couple: the wife works her whole life and earns a great salary. The husband is a stay-at-home dad. When the couple retires, they receive $100,000 each year from the wife’s substantial savings, and that money is taxed in a high-income bracket.

With a spousal RRSP, the wife makes annual contributions to her husband’s account. So when they retire, they each receive $50,000 in retirement income. It’s the same total income, but because each spouse is in a lower tax bracket they pay less total tax than in the first case.

Who owns the plan?

The spousal RRSP is registered under the name of the spouse earning the lower income and the plan belongs to that person. This person makes the investment decisions and is the only one authorized to withdraw money. The sole, but important role of the spouse earning a higher income is to contribute the money.

During the couple’s working years, the spouse contributing on behalf of the lower earning partner deducts the spousal contribution from their taxable income just as they would for contributions to his/her own account.

What are some spousal RRSP rules you should know?

There’s a 3-year attribution rule, which means contributions to a spousal RRSP can’t be withdrawn for at least three years after the date they were contributed. If the funds are withdrawn within 3 years, the money becomes taxable income for the contributing spouse.

Your RRSP contribution limit is the same whether you have two accounts or just one. For example, if your contribution limit is $20,000, you can divide that amount between your RRSP and the spousal RRSP. You can put $15,000 in one and $5,000 in the other. Just don’t exceed the total limit.

Like a regular RRSP, you can keep contributing to a spousal plan until the end of the year your spouse turns 71.

RRSPs can convert into retirement income products, such as registered retirement income funds (RRIFs) or annuities, at the end of the year you turn 71. At this point, the retirement income would be taxed in the lower-earning spouse’s name at his/her current tax bracket.

Speak to an investment representative if you still have questions and to find out whether spousal RRSPs are right for you.

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