The ABCs of Spousal RRSPs
July 15, 2020
A spousal* RRSP is exactly what it appears to be, quite simply a Registered Retirement Savings Plan (RRSP) for a spouse; a plan that cannot only help set aside funds for you and your spouses’ retirement, but can save you some tax dollars in the process. The idea is that one person, typically the higher earner, contributes money to the spousal plan on behalf of their spouse. The primary benefit is that a contribution can be made each year and the receiving spouse will see a tax-free return until those assets are withdrawn.
A spousal RRSP is typically utilized when one spouse has significantly more money in their RRSP than the other. By splitting the invested amount between an RRSP and a spousal RRSP, both of you can enjoy retirement dollars and pay less tax overall by withdrawing the funds when you are both in a lower tax bracket.
Let’s see how this works – Assume you earn $100k and your spouse earns $50k. With RRSP contribution limits of 18%, you can deposit $18k and your spouse can deposit $9k to your respective RRSPs. However, if using a spousal account, you can deposit, let’s say, $13k to your own account and $5k to the spousal account. Your total contribution is still $18k, but divided over two accounts, allowing you to split the income with your spouse. Your spouse can still deposit their original $9k into their account.
The scenario becomes quite different without a spousal RRSP: let’s imagine that you have $1 million upon retirement and your spouse has $400k at this same time. A standard 5% withdrawal rate would result in taxable income of $50k for you and $20k for your spouse, with your $50k annual withdrawal taxed at a higher rate. If a spousal RRSP had been set up, both accounts could have accumulated $700k each (same total amount) and taken out an annual income of $35k per spouse, resulting in tax at a lower rate.
A spousal RRSP can also be used to save on taxes if one member of the couple is over 71 years of age but the other is not. When a spousal RRSP is opened, contributions can be made on behalf of the spouse who is not over 71 - and claim the income deduction on that deposit. In addition, spousal RRSP payments can still be made in the year of death.
It is worth noting that contributions to a spousal RRSP must remain in the fund for three calendar years from the year they are contributed or else the withdrawal amount will be added to your net income for that year and taxes will have to be paid at your tax rate.
*spouse includes a common-law partner