Spousal registered retirement savings plans (RRSPs) are a way Canadian couples can split their income and pay less tax in retirement. Think of it as an investment account for your spouses retirement—you make the contributions now and get the tax deductions, your spouse takes income from it later and pays the resulting income tax.
With a regular RRSP the plan is registered in your name, you’re the one contributing money to it, and you control how it’s invested. With a Spousal RRSP you’re still the one contributing money to it but the plan is registered in your spouses name and they control how it’s invested. It belongs to them, not you, even though you’re the one making the contributions and getting the tax refund.
Spousal RRSPs can be helpful for couples (married or common-law) who have a large gap between their incomes. Let’s say you make $100,000 a year and your partner makes $20,000. You’ll be racking up much more RRSP contribution room than your partner (18% of $100,000 versus 18% of $20,000) so you’re able to put more money into your RRSP than your partner is.
If things carried on like this, by the time you got to retirement you would have a big pile of money in your RRSP and your partner would have a much smaller pile in theirs. You’d have to withdraw more money each year and pay more tax than your spouse.
The spousal RRSP lets you use your contribution room to put some money into your RRSP and some into a spousal RRSP for your partner. That way when you retire you’ll have similar sized piles of money in your RRSPs, you’ll both be in lower tax brackets, and you’ll pay less income tax overall. Three cheers for paying less tax, right?
Spousal RRSPs can also be useful if that spouse is planning to stay at home with the kids for a few years or go back to school. While unemployed, they can withdraw money from their spousal RRSP and pay a little bit of tax on it (you just have to be careful of attribution rules, which we’ll get into below!).
Similar to the RRSP, if you’re a first-time home buyer you can take advantage of the Home Buyers’ Plan to withdraw up to $25,000 from your spousal RRSP.
Lastly, if you’re older than your spouse you can continue contributing to their spousal RRSP up until the year they turn 71. You can’t contribute to your own RRSP past the year you turn 71, but if you’re 71 and your spouse is 61 you can keep contributing to theirs for another 10 years!
The amount you can contribute in any given year is dictated by your RRSP contribution limit, which you can find on your most recent notice of assessment (NOA). Whether you’re contributing to you own RRSP, a spousal RRSP, or both, the total amount you contribute can’t exceed your limit. If your limit this year is $20,000 you can’t go contributing $20,000 to yours and $20,000 to your spouses. You’ll want to keep good track of your contributions so that you don’t over-contribute and get hit with penalties!
While there are situations where you may want to take money out of a spousal RRSP before retirement (like if you decide to stay at home with your kids or go back to school) the account really is designed for retirement, so you have to be careful of attribution rules if you withdraw money before then. If your spouse withdraws income within three calendar years of you contributing it, it’ll be attributed back to you and you’ll get hit with the tax bill, not your spouse.
Finally, you’ll also want to factor in any pension plans, inheritance, or other expected income sources in retirement to make sure a spousal RRSP will truly help you balance your income and lower your overall tax bill. If you want to chat through it (we totally get that this can be confusing!) you can always book a call with a Plan Pro.