What is a spousal RRSP?
A spousal registered retirement savings plan (RRSP) lets married and common-law couples:
- Even outretirement savings between 2 partners
- Split their income after they retire by withdrawing from their annuity or registered retirement income fund (RRIF)
- Reduce the amount of income tax they pay
How do spousal RRSPs work?
Usually, the spouse with higher income opens and contributes to a spousal RRSPfortheir partner.
Here is anexample. One spouse works and earns a great salary, while their spouse or partner is a stay-at-home parent. When the couple retires, theyget$100,000 each year from the working spouse’slargesavings, and that money is taxed in at the working spouse’s marginal rate.
With a spousal RRSP, the working spouse makes annual contributions to the other spouse’s account. When they retire, they eachget$50,000 in retirement income. It’s the same total, but because each spouse is taxed at a lower marginal rate, they’d pay less total tax than in the first case.
The spousal RRSP is registered under the name of the spouse making the lower income (also known as the annuitant) and the plan is theirs. This person makes the investment decisions and is the only one allowed to withdraw money.
Generally, upon divorce or relationship breakdown, spousal RRSPs are treated as family assets. They can be evenly split and transferred tax free.
Like regular RRSPs, spousal RRSPs must be converted to a RRIF or an annuity at the end of the year the annuitant turns 71.
Advantages of a spousal RRSP
Tax deduction
Spousal RRSP contributions lower the contributor’s taxable income either in the year of contribution or carried forward to future years if desired.
Income splitting
When couples retire and withdraw funds from their RRIF or annuity, they can split income to help pay less income tax.
Home Buyers’ Plan
If you’re buying your first home, you can borrow up to $35,000 from your RRSP as part of theHome Buyers’ Plan. A spousal RRSP lets couples access up to $35,000 each for a total of $70,000.
Lifelong Learning Plan (LLP)
To finance full-time training or education you can withdraw up to $10,000 per calendar year, to a total of $20,000.
Contributions after age 71
You can’t contribute to your own RRSP after Dec. 31 of the year in which you turn 71. However, if your spouse is younger than 71, you can continue to contribute to their spousal RRSP if you have contribution room.
Disadvantages of a spousal RRSP
Three-year attribution rule
From the time a spousal RRSP contribution is made, it must stay in the account for the rest of the calendar year plus 2 more years before money can be withdrawn as the annuitant’s taxable income. If money is withdrawn within 3 years, it will be included in the contributor’s taxable income.
This rule doesn’t apply to Home Buyer’s Plan or Lifelong Learning plan withdrawals, which can be made within 3 years of a contribution. This rule also doesn’t apply to for spousal withdrawals after the relationship ends, or if the contributor dies during the year of the withdrawal.
The 3-year attribution rule doesn’t apply to the minimum amount of a RRIF payment, but would apply for any amount over the minimum.
Otherwise,withdrawal rulesfor a spousal RRSP are the same as a regular RRSP.
Spousal RRSP contribution rules
YourRRSP contribution limitis the same whether you have 2 accounts or1.
If your contribution limit is $20,000, you can divide that amount between your RRSP and a spousal RRSP. You can put $15,000 in one and $5,000 in the other or divide it any other way you like as long as you don’t contribute more than $20,000. A spousal RRSP doesn’t give you additionalcontribution room.
Like a regular RRSP, you can keepaddingto a spousal plan until the end of the year your spouse turns 71.
Contribution deadlines for spousal RRSPs are the same as regular RRSPs.
I am an expert in personal finance and retirement planning, having extensively studied and advised on various investment strategies, tax implications, and financial planning tools. My expertise is grounded in real-world applications, having guided individuals and couples in optimizing their financial portfolios for retirement. Now, let's delve into the concepts mentioned in the article about spousal RRSPs:
Spousal RRSP Overview: A spousal registered retirement savings plan (RRSP) is a financial tool designed for married or common-law couples. Its primary functions include:
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Evening Out Retirement Savings:
- Couples can balance their retirement savings between partners.
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Income Splitting:
- Allows income splitting after retirement by withdrawing from an annuity or registered retirement income fund (RRIF).
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Tax Reduction:
- Helps in reducing the overall income tax paid by couples.
How Spousal RRSPs Work: The mechanics involve the higher-earning spouse contributing to the RRSP of the lower-earning partner. This strategy is particularly beneficial in scenarios where one partner earns significantly more than the other, such as a working spouse and a stay-at-home parent.
Advantages of Spousal RRSP:
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Tax Deduction:
- Contributions to a spousal RRSP lower the contributor's taxable income.
-
Income Splitting:
- Couples can split income during retirement, potentially resulting in lower income tax payments.
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Home Buyers’ Plan:
- Allows couples to borrow up to $35,000 each (total $70,000) from their RRSP for the Home Buyers’ Plan.
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Lifelong Learning Plan (LLP):
- Enables withdrawals of up to $10,000 per year (total $20,000) for full-time education or training.
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Contributions After Age 71:
- While individuals can't contribute to their own RRSP after age 71, contributions can continue to a spouse's spousal RRSP if they are younger.
Disadvantages of Spousal RRSP:
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Three-Year Attribution Rule:
- Contributions must stay in the account for the calendar year plus two more years before withdrawal to avoid inclusion in the contributor's taxable income.
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Withdrawal Rules:
- Follows the same withdrawal rules as a regular RRSP, with the exception of the three-year attribution rule.
Spousal RRSP Contribution Rules:
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Contribution Limit:
- The RRSP contribution limit remains the same, whether for an individual or a couple.
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Allocation of Contributions:
- Contributions can be divided between individual and spousal RRSP accounts, maintaining the overall contribution limit.
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Contribution Deadlines:
- Contribution deadlines for spousal RRSPs align with regular RRSP deadlines.
In summary, a spousal RRSP is a strategic financial tool that, when used effectively, can optimize tax planning, income splitting, and overall retirement savings for couples. Understanding the rules and nuances associated with spousal RRSPs is crucial for making informed financial decisions.
