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. Spousal RRSPs have several unique features. Knowing what to watch for may help you avoid a costly spousal RRSP mistake.
What is a spousal RRSP?
Like traditional RRSPs, spousal plans allow for tax-deferred contributions and investments to grow tax-free inside the plan. A spousal RRSP is a retirement account set up in one spouse’s name (designated as the annuitant) and the other spouse contributes.
Spousal RRSPs are 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 will pay less tax overall.
How do spousal RRSPs help you save on taxes?
Spousal RRSP contributions are most beneficial for couples where one spouse makes significantly more money. For example, one spouse might be a stay-at-home parent, while the other works full time.
RRSP withdrawals are taxable at your personal income tax rate. Splitting the RRSP withdrawals between two people enables you to 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 (e.g., 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 older than 71 (who can no longer make RRSP contributions due to their age) may also benefit. If your spouse is under the age of 71, you can contribute to their spousal plan for a tax deduction, even though you can no longer contribute to your own RRSP.
What are the deduction limits for a spousal RRSP?
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.
Who can withdraw from a spousal RRSP?
An RRSP owner (the annuitant) is generally the only person who can make withdrawals.
However, if the annuitant withdraws from their spousal RRSP within the first three years of the contribution date, the contributor may be required to pay tax on the withdrawn amount.
Exceptions to this rule include circumstances such as breakdowns in a relationship, death of a partner, and others that you can learn more about on the Canada Revenue Agency website.
What happens to a spousal RRSP in the event of divorce?
In the unfortunate event that you get divorced or your relationship breaks down, it is important to remember that the spousal RRSP belongs to the annuitant, not the contributor.
Additional considerations to take into account with a spousal RRSP in the event of divorce or relationship breakdown:
- This qualifies as an exception to who is responsible for paying taxes on withdrawals made within three years of the contribution date
- Spousal RRSPs are considered an asset, but are divided differently depending on whether you are married or common-law
Can funds be transferred between RRSPs?
You can only transfer funds between RRSPs that have the same owner. For that reason, it’s important to note that you cannot move funds from your own RRSP to a spousal RRSP in your partner’s name.
How long can I contribute to a spousal RRSP?
You can contribute to a spousal RRSP until your spouse is aged 71 (as long as you have contribution room), even if you are older than the maximum contribution age for your own RRSP.
Further, when a contributing spouse dies, their representative has an option to contribute to the surviving spouse’s spousal RRSP during the year of death or 60 days thereafter, as long as the deceased had contribution room.
A version of this article was originally published on January 7, 2019