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Spousal RRSP

So, what is it exactly?

Spousal registered retirement savings plans (RRSPs) are one of the ways that Canadian couples (married, common law or same-sex) can split income in retirement. Think of them as investment accounts for your spouse’s retirement that allow you to contribute money tax-free each year. Your spouse will see a tax-free return on that money as well, until it is withdrawn.

They are often used to lighten the tax load for couples with big income disparity as it avoids a higher-income earner from having a large pile of retirement savings in his RRSP while the lower-income earner has a small pile.

What are the pros?

To understand the tax benefits that spousal RRSPs make possible, consider this example. You are a big earner. You make $100,000 a year, while your spouse makes $50,000. If you both had RRSPs to which only the owner could contribute, you could put $18,000 into to your RRSP (the maximum allowed each year) while your husband/wife could contribute $9,000 to his (both amounts represent the maximum).

With a spousal RRSP, you can even things out a little bit. You can contribute, say, $14,000 into yours and $4,000 into his/hers. You can still take the total $18,000 deduction on your income tax (and he/she will of course still contribute the $9,000 and take that deduction too).

Without spousal RRSPs, at retirement you could have $1 million in savings while your spouse has $400,000. At a standard 4% withdrawal rate, you would be taking a $40,000 a year income (and paying a lot of taxes!) while your spouse is only taking $16,000 a year. With spousal RRSPs, the goal is to equalize the retirement savings between spouses so that each one has a pot of $700,000 and is withdrawing $28,000 a year.

Spousal RRSPs aren’t just for retirement, though. Say, for instance, one parent decides to leave work and stay home with their kids, or to go back to school. Contributing to a spousal RRSP in advance will allow that spouse to withdraw money while unemployed and pay only a little bit of tax — while saving the contributing spouse some tax money now.

Another advantage to these accounts is that you can use them to save on taxes if you’re over the age of 71 but your spouse is not – or even to save tax on your estate after death. You can make a contribution to a spousal RRSP on behalf of your under-71 husband or wife and claim the tax deduction on that money. Likewise, if you die, your estate can contribute that money to the account in order to provide some inheritance tax free.

Is there anything to be careful about?

The government has lots of regulations set up to keep people from using their spousal RRSPs to cheat on their taxes — and that can make it a little complicated to navigate the accounts. For starters, your RRSP contribution limit doesn’t change if you have two accounts to choose from — in other words, don’t max out your yearly contribution on your RRSP and then max it out again on your spouse’s!

Secondly, spousal RRSP contributions cannot be withdrawn for three calendars years from the year they were contributed or else the contributor will have to pay tax on the money (this is called the Three Year Attribution Rule). For example, if you contribute $5,000 to a spousal RRSP on Dec. 1st, 2015 hoping that your income-less spouse can withdraw in in January, think again. If that money is withdrawn in 2015, 2016 or 2017, it will be added to your income (and subsequent tax bill!), not your spouse’s.