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Spousal RRSPs: What Are They and Are They Right for You?

Plenty of Canadians plan for their future by investing money in Registered Retirement Savings Plans, or RRSPs. These plans offer two primary advantages. First, RRSP contributions help lower an individual’s annual tax bill because, up to an annual limit, the amount you contribute is deducted from your income when filing. The result: saving for retirement can help you save on taxes, too.

Second, investment gains within an RRSP aren’t taxed until the money is withdrawn. Most people don’t take money out until retirement, when they’re earning less and, as such, are taxed at a lower rate than when they made the contributions.

Canadian couples who are legally married or living in common-law relationships can utilize a further benefit: spousal RRSPs. Spousal RRSPs offer income-splitting tax advantages that are especially helpful to couples who have unequal earnings, whether it be due to childcare obligations, a return to education in later life, or simply the result of different career paths and responsibilities.

What are spousal RRSPs?

A spousal RRSP is just like a normal RRSP, except that some or all the contributions are made by the spouse or common law partner of the plan’s holder (also known as the annuitant).

The idea of a spousal RRSP is this: when one partner earns more money than the other, that individual can contribute funds on their partner’s behalf. These contributions are still eligible to be deducted from an individual’s income at tax time.

However, the impact is greater over the long term. A spousal RRSP helps to balance out the contributions made by both partners. In retirement, each partner is able to withdraw from their savings more equally, thereby reducing the tax burden faced by the higher-earning partner.

For instance, instead of a couple splitting a highly taxed annual retirement income of $100,000 generated by the high-earning partner, a spousal RRSP allows each to earn closer to $50,000 annually and pay a lower marginal tax rate on that income.

Spousal RRSPs are also advantageous to couples of different ages. By the end of the year in which you turn 71, funds held within an RRSP must be converted into a Registered Retirement Income Fund, or RRIF. This is when the withdrawal process begins, as well as the taxation of withdrawals. If your partner is younger, however, you can continue to contribute to their spousal RRSP until the end of the year in which they turn 71.

Understand ownership

A spousal RRSP always belongs to the annuitant, even if that person didn’t contribute a single dollar. The plan holder is responsible for all investment decisions and is the only person entitled to withdraw funds. This can become complicated if the marriage or relationship breaks down and ends in separation or divorce. In such instances, one spouse may have to make a so-called ‘equalization payment’ to the other.

Know the rules around withdrawals

To gain the full tax advantages of contributions to a spousal RRSP, the rules require the money to remain in the account for two full calendar years beyond the year of the most recent deposit. If funds are withdrawn too soon, the money will be taxed as belonging to the contributor, not the recipient.

Even if you’ve been contributing for several years, none of the funds can be withdrawn without penalty until the appropriate time has passed. For instance, if you contributed money in January 2023, the earliest it could be withdrawn is the start of 2026. However, this ‘three-year attribution rule’ does not apply to funds withdrawn through the Home Buyer’s Plan.

Don’t exceed your contribution limit

Remember that contributions to a spousal RRSP count against the annual limit of the contributor, not the annuitant. Opening a spousal RRSP does not create any additional contribution room for the higher-earning spouse. While the government permits up to $2,000 in annual wiggle room for over-contributions, amounts beyond that are taxed at a rate of one per cent each month.

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