Q

What is a Spousal RRSP?

A

It's one of the ways that Canadian couples (spouses or common law partners) can split income in retirement.

Think of spousal registered retirement savings plans as investment accounts for your spouse or partners retirement. The main advantage is that they allow you to contribute money tax-free each year. Your spouse or partner will see a tax-free return on that money as well, until it is withdrawn.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 in their retirement. Should one person have a lot of money in their RRSP and the other have less then at retirement they may pay more income tax. Had each person evened out their contributions, they could potentially pay less income tax in retirement by being in a lower tax bracket.

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Advantages of spousal RRSPs

To understand the tax benefits that spousal RRSPs make possible, consider this example. Imagine either yourself or your spouse/partner earns more than the other. One of you makes $100,000 a year, and the other makes $50,000. Individual RRSP limits are 18% of your income from the prior year’s taxes, up to a maximum dollar amount that changes annually. The latest limits can be found here. If you both had RRSPs to which only the owner could contribute, the person earning $100,000 could put $18,000 into to your RRSP (18% of your income) while the person earning $50,000 can contribute the same percentage, $9,000.

When you open a spousal RRSP, you can even things out a little bit. The person earning more money can contribute, say, $14,000 into theirs and $4,000 into their spouse/partners. They can still take the total $18,000 deduction on their income tax (and the other person will still contribute the $9,000 and take that deduction too).

Without spousal RRSPs, at retirement one person will have $1 million in savings while the other will have $400,000. At a standard 4% withdrawal rate, one spouse will be taking a $40,000 a year income and paying a lot of taxes! The other will only be taking $16,000 a year. Should they open a spousal RRSP they could equalize the retirement savings between them so that each one has a pot of around $700,000 and is withdrawing about $28,000 a year.

Spousal RRSPs aren’t just for retirement, though. Say, for instance, one person 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 person 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/partner is not – or even to save tax on your estate after death. When you open a spousal RRSP you can make a contribution on behalf of your under-71 spouse 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.

Note: 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 or partners!

You should also be mindful of management fees charged on RRSPs - these eat into the amount you actually save. Large banks often charge high management fees for Spousal RRSPs. Typically, you can avail of lower fees by opening or transferring your RRSP to an online robo-advisor.

Disadvantages of spousal RRSPs

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, 2018 hoping that your income-less spouse or partner can withdraw in in January, think again. If that money is withdrawn in 2018, 2019 or 2020, it will be added to your income (and subsequent tax bill!), not your spouse or partners.

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