When planning for retirement, most Canadians will use a
In this guide, we’ll explain how spousal RRSPs work and what situations make them sensible for couples.
What is an RRSP?
To begin, an RRSP is a savings account designed to encourage Canadians to save for retirement. Any contributions made to an RRSP reduces your taxable income by an equal amount. For example, if you earned $60,000 and contributed $5,000 to your RRSP, your taxable income for the year would be $55,000.
Additionally, any growth from investments within your RRSP is tax-deferred until you withdraw the funds. The assumption is that those funds will only be accessed when you’re retired and in a lower tax bracket, thus reducing the amount of taxes you owe.
RRSP contribution room is based on 18% of your earned income from the previous year. Although the Canada Revenue Agency establishes an annual contribution limit, any unused room is carried forward.
How does a spousal RRSP work?
A spousal RRSP is an RRSP that one spouse opens in the name of the other spouse. While the receiving spouse is the legal owner of the account and will eventually withdraw the funds, the contributing spouse receives the tax deduction.
This strategy primarily benefits couples in which one partner earns significantly more than the other. The higher earner receives the tax deduction, while the lower earner has the opportunity to build their retirement account. This distributes retirement income more evenly between partners, and it lowers the overall tax paid when funds are withdrawn.
What are the spousal RRSP contribution limits?
The contribution room for a spousal RRSP is determined by the contributor, not the recipient. For example:
● If Eric has a contribution room of $30,000, he could contribute $20,000 to his own RRSP and $10,000 to his wife Julie’s spousal RRSP.
● Julie’s own contribution room would remain unaffected, allowing her to fund the spousal RRSP or her own individual RRSP, provided she does not exceed her own contribution limit.
Note that a spousal RRSP must be designated when the account is opened.
Spousal RRSP withdrawal rules
One withdrawal rule to be aware of in spousal RRSPs is the “attribution rule.” If the spouse withdraws any funds from the spousal RRSP within three calendar years, the withdrawal is taxed in the contributor’s name. This rule exists to ensure couples do not exploit the system.
After three years, withdrawals follow the standard RRSP withdrawal rules. Once the spousal RRSP is converted into a Registered Retirement Income Fund (RRIF), no restrictions apply.
Spousal RRSPs: Pros and cons
Spousal RRSPs offer both benefits and potential drawbacks based on your tax situation. Understanding the advantages and disadvantages can help determine whether this strategy aligns with your long-term retirement planning goals.
Pros of a spousal RRSP
● Income splitting: It assists couples in lowering their overall tax burden during retirement by equalizing their incomes.
● Tax break: The contributor reduces their taxable income for the year.
● Retirement planning: Accounts can help when a spouse has a significantly higher income or plans to retire early.
Cons of a spousal RRSP
● Complexity: It requires planning, as there are contributions, admin work, and tax breaks to consider:
● Attribution rules: You cannot withdraw funds for three years, or they will be taxed in the contributor’s name.
● Limited room: Opening an account doesn’t provide you with extra contribution room. You remain limited by the higher earner's own cap.
Who should open a spousal RRSP?
A spousal RRSP is ideal in the following situations:
● Income disparity: One spouse earns considerably more than the other, making income-splitting strategies essential for tax efficiency in retirement.
● Uneven retirement income: If one partner has a generous pension, while the other is relying on their own savings, a spousal RRSP would even out incomes for tax purposes.
● Those looking to retire early: If one spouse plans to retire earlier, withdrawing from their spousal RRSP can help address income needs.
Final thoughts
Spousal RRSPs may not be suitable for every couple, but in circumstances where they are applicable, they can greatly reduce the total taxes owed. Like all
Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog
Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.