Spousal RRSPs A tax-saving strategy for couples

A spousal RRSP is a registered retirement savings plan (RRSP) registered in the name of your spouse or common-law partner. You make contributions to the plan on behalf of your spouse or common-law partner, and as a result, you receive a tax deduction for all the contributions you’ve made. It is important to note that you can only contribute to your spouse’s plan provided you still have contribution room available. Any contributions you make will be deducted from your overall RRSP limit, but do not affect your spouse’s contribution limit. All contributions are then invested and controlled by the owner of the plan—your spouse.

The main objectives

The key reason for setting up a spousal RRSP is to facilitate income splitting. Income splitting is the transferring of money to a lower-income-earning spouse, so that in the future, income is taxed at a lower tax rate.

This process helps to decrease the overall tax burden of the family by lessening the income of the higher-earning spouse. At retirement, all of the withdrawals made from the spousal account may be taxed in the hands of the lower income spouse, who will ideally be in lower tax bracket.

Another key benefit of spousal RRSPs is that they also offer retirement savings flexibility. Such plans enable the older spouse, who is over 71 and no longer eligible to contribute to their own RRSP, to contribute to a spousal plan. For this to work, it is key that the contributing spouse still have RRSP contribution room and that the younger spouse is age 71 or younger in the year of contribution. In making use of this strategy, you will be able to continue building your family’s retirement savings, potentially well after you’ve reached your cut-off age for making RRSP contributions.

  • When does a spousal RRSP make sense? – The best-case scenario for a spousal RRSP is when the namesake of the plan is expected to have very little income in retirement, while the contributing spouse is expected to have a substantial amount of income in retirement. Where a couple would otherwise have very unequal incomes in retirement, the tax savings can be substantial because of the fact that a couple receiving two modest incomes during retirement will generally pay less tax than a couple with one spouse reporting all the household income.
  • Income attribution rules – As with all financial strategies, there is almost always a catch. The catch with spousal RRSPs is a specific set of tax rules called attribution rules. These rules attempt to block income splitting by attributing the RRSP income being withdrawn back to the contributor, which can nullify the benefits of establishing a spousal RRSP.
    If the owner of a spousal plan withdraws money during the same year a spousal contribution is made, or in the two years following a contribution, the contributing spouse will have to pay the tax on the withdrawn money at his or her own potentially higher tax rate. This can pose a significant tax cost, especially if you’re living on fixed income during retirement. The bottom line is that unless you allow your contributions to stay invested for three years, the family may be no better off financially than if the spousal RRSP contribution had never been made.
  • Can I roll my spousal RRSP into a spousal RRIF? – Because attribution rules don’t apply if only minimum payments are withdrawn from a spousal RRIF, a common strategy to avoid income attribution rules is to roll the spousal RRSP into a spousal RRIF. Although promising, this strategy is hindered by the fact that the minimum payment you can receive in the first year of the RRIF is zero! However, if you can arrange your affairs to convert the spousal RRSP to a spousal RRIF late in the year, your minimum payment will not be nil by January of the following year. If you decide to take out more than the minimum payment, the attribution rules will apply if the three-year period has not elapsed since the last contribution.
  • Do the attribution rules apply differently if I have two spousal plans? – If you have two spousal plans and one plan meets the attribution test and the other plan does not (violates the three-year rule), the attribution rules would still apply to either of the spousal accounts. Because taxation issues surrounding these kinds of plans can be quite complex, it is always a good idea to consult a qualified tax advisor before you make any decisions concerning spousal RRSPs.
  • Easing the burden – Depending on your specific situation and financial goals, spousal RRSPs may help you to ease your family’s overall tax burden and better save for retirement.

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