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How a spousal RRSP may fit with your financial plans

If you and your spouse or common-law partner are looking for ways to minimize your tax burden, a spousal Registered Retirement Savings Plan (spousal RRSP) may be the answer. Like traditional RRSPs, these plans allow for tax-deferred contributions and investments that grow tax-free while they’re inside the plan. Yet spousal RRSPs have several unique features. Knowing what to watch for may help you to avoid making a costly spousal RRSP mistake.

What is a Spousal RRSP?

A spousal RRSP is a retirement account set up in one spouse’s name but that the other spouse contributes to. It’s available for married and common-law couples in Canada to help with income-splitting for tax purposes. These RRSPs help couples with divergent incomes divide their retirement income more equally so they’ll pay less tax overall. 

A spousal RRSP belongs to the partner who’s named as the owner, (the annuitant), while the partner who makes the contribution is named as the contributing spouse.

When to Use a Spousal RRSP

Spousal RRSP contributions are most beneficial for couples where one spouse makes significantly more money than the other, such as when one has a high-paying job and the other is a stay-at-home parent. 

RRSP withdrawals are taxable at your personal income tax rate. By splitting the RRSP withdrawals between two people, you’ll each pay tax at an individual lower rate, instead of having one partner taxed at a higher rate for withdrawing a larger amount. For example, depending on other income sources (like pension payments), a family where one spouse withdraws $60,000 from their RRSP in one year will pay more in income tax than a family where each spouse withdraws $30,000 - one from an RRSP and one from a spousal RRSP.

Canadians over 71 who can no longer make RRSP contributions due to age may also benefit. Make a contribution to your younger partner’s spousal plan (they must be below age 71) for a tax deduction, which you would no longer normally qualify for.

RRSP Deduction Limits and Spousal RRSPs

Before making a spousal RRSP contribution, review your current RRSP deduction limit on your most recent Notice of Assessment. The total deduction for both your own RRSP contribution and any contribution to your spouse’s RRSP can’t exceed your current RRSP deduction limit.

Withdrawing From a Spousal RRSP

An RRSP owner or annuitant  is generally the only person who may make withdrawals.  However under the “Three Year Attribution Rule”, contributions made within the past three years (the year of the withdrawal and the previous two years) may be attributed back to the contributing spouse as income during the withdrawal year. Visit Canada Revenue Agency’s “Withdrawing From Spousal or Common-Law Partner RRSPs” for more information.

Spousal RRSPs and Marital Breakdowns

Spousal RRSPs belong to the named owner or “annuitant” on the account, not the contributing spouse. This is an important point should a couple divorce. [Source

Also, when a marriage or common-law union ends and a couple lives “separate and apart because of the breakdown of the relationship”, the three year attribution rule may not apply, according to CRA.

Transferring Funds Between RRSPs

Funds can only be transferred between RRSPs that have the same owner. This is important to note when it comes to spousal RRSPs -- you cannot move funds from your own RRSP to a to a spousal RRSP in your partner’s name. [Source]

How Long Can I Contribute to a Spousal RRSP?

You may contribute to a spousal RRSP until your spouse is 71, as long as you have contribution room. When a contributing spouse dies, their representative may make a contribution to the surviving spouse’s spousal RRSP during the year of death or 60 days thereafter, as long as the deceased had contribution room.
To learn more about spousal RRSPs, visit CRA’s “Contributing to Your Spouse’s or Common-Law Partner’s RRSPs”.

Before contributing to a spousal RRSP, it’s important to understand the benefits and limitations as they may not benefit all married or common-law couples. For more information on how a Spousal RRSP may fit your own financial plans, find a wealth management advisor today.