What is a Spousal RRSP?
A spousal RRSP is a popular type of registered savings account that can be used by married and common-law couples.
Similar to a regular RRSP, spousal RRSPs allow for money to be contributed each year in order to reduce taxable income.
The main difference in a spousal RRSP is that the partner with higher earnings can choose to take part of their contribution room and contribute it to their spouse’s RRSP.
How does a Spousal RRSP Work?
Spousal RRSPs work very similarly to regular RRSPs.
Each year, individuals can contribute a set amount into either an RRSP or a spousal RRSP.
This amount is currently set at 18 percent of last year’s income (up to a maximum of $27,230 for 2020), as determined by the federal government.
While the contribution limits do not change in spousal RRSPs, users can benefit from being able to spread out the money earned between the two partners more evenly.
Furthermore, in their later years, being able to evenly withdraw money to fund their retirement income will help reduce the tax burden on both individuals.
Did You Know?
Your RRSP contribution room can be found on your Notice of Assessment from last year’s tax returns, as well as MyAccount on the Canadian Revenue Agency website.
For example, let’s consider a working couple where the husband makes $50,000 and the wife makes $100,000.
Currently, individuals can contribute up to 18% of their previous year’s income to their RRSP.
This means that the wife can contribute $18,000 and the husband can contribute $9,000.
With a spousal RRSP, the higher-earning wife can choose to contribute $13,500 into her own account and then $4,500 into her husband’s account.
This way, the husband (with $9,000 of his own money and $4,500 of his wife’s money) and wife will both have $13,500 in their respective RRSP accounts for that year.
Once they reach retirement age, both spouses will be able to take out money from their respective RRSPs.
With each partner having their own nest egg that can be withdrawn, the taxes paid by each individual will be much lower.
Without spousal RRSP accounts, the higher-earning spouse would have a much larger RRSP account balance, and withdrawing money as only one person rather than two would result in much higher taxes paid.
How do I contribute to a Spousal RRSP?
The spousal RRSP is usually opened under the name of the spouse earning a lower income.
The spouse earning the higher income will be responsible for contributing to the account, but decisions regarding the account (e.g., withdrawal, investments) can only be made by the account holder.
Deposits are made the same way as regular RRSP accounts.
The contribution limits still apply, meaning that the amount that can be deposited into a spousal RRSP is based on your own contribution room.
How do I withdraw money from a Spousal RRSP?
As a retirement savings account, most couples will choose to wait until retirement age before dipping into their spousal RRSP account.
Withdrawals are taxed under the same rules as regular RRSPs.
The account holder is the only one that is able to make withdrawals, and money that comes out will count as taxable income for them.
One exception is when the accountholder withdraws within three years of contributions from their spouse.
In that case, the withdrawal will be added to the taxable income of the contributing spouse in the year of withdrawal.
Benefits of a Spousal RRSP
1. Less overall taxes
With spousal RRSPs, the higher-income spouse contributes to the lower-income spouse’s RRSP.
At the end of the day, having two RRSP accounts that can be withdrawn from in your later years means that less income tax will be paid.
2. Taking time off work
If one spouse decides to take time off work (for example, to raise children or go back to school), they can withdraw money from their RRSP.
This spouse will end up paying very little tax on these withdrawals as they are not earning any other income.
3. Continue RRSP contributions past 71
Regular RRSP accounts do not allow for contributions past the age of 71.
However, if one spouse is over 71 and one is still under 71, the older spouse can continue contributing their spousal RRSP to utilize their contribution room
Drawbacks of a Spousal RRSP
1. Attribution rules
While RRSPs are meant for retirement, having the ability to access funds during emergencies is important.
With spousal RRSPs, the contributor will have to pay the taxes if money is withdrawn within three years of contributing.
This makes it harder to dip into RRSPs during times of need.
2. One person controls the account
With a spousal RRSP, the contributor does not have any say in what happens to the money they contribute.
The account holder is the only one with the power to decide how to invest the money and when to withdraw it.
In cases of divorce or separation, there may be complexities when it comes to deciding how to split this money.
Frequently Asked Questions
- What’s the difference between an RRSP and a spousal RRSP?
Both of these account types are very similar. Whether you decide to put your money into an RRSP or a spousal RRSP, the contribution room and tax benefits at the time of contribution remain the same. The main difference is that the spousal RRSP allows you to use your contribution room towards your spouse’s RRSP, ultimately splitting your income in later years and allowing you to pay less tax on income during retirement.
- Is a spousal RRSP a good idea?
In general, a spousal RRSP is a great idea for couples with large income gaps who are planning for retirement. These accounts allow couples to maximize the tax benefits of RRSPs – both in the present day as well as in their retirement.
- Who can contribute to a spousal RRSP?
It is usually the higher-earning spouse who will choose to contribute to the spousal RRSP of the lower-earning spouse. This allows the couple to maximize the tax benefits that are designed to be part of spousal RRSP accounts.