Spousal RRSP’s

I have to say, Spousal RRSP’s are probably the least understood investment account. With today’s post, I hope to change that. I’ll be discussing what the Spousal RRSP is, how contributions and withdrawals work, and the various uses for this type of account over a regular RRSP.

Before I begin, if you’re not sure what a regular RRSP is, I’d start with this video “Rethinking RRSP’s” before watching today’s episode.

A spousal RRSP has many of the same characteristics as a regular RRSP, except for one very important distinction. Contributions to your spouse’s RRSP reduce your income and your RRSP contribution room.

For these purposes, a spouse includes someone you are legally married to and a common-law partner who you have been living together for 12 months or more. This account is useful for couples where one spouse is in a higher tax bracket than the other spouse.

To better illustrate this, let’s take an example.

Suresh and Divya are married. Divya makes $150,000 per year and has $30,000 in available contribution room, and has an RRSP worth $60,000. Suresh stays at home and looks after their 2 children. He has $13,000 in available RRSP contribution room earned when he was still working, and doesn’t have any retirement accounts.

They are looking to make a contribution worth $20,000. Since Divya has a higher income, it makes sense to reduce her income tax, and receive a higher tax refund for her deduction.

They also want to start evening out their assets so they have relatively similar retirement account values when they retire. In order to do this, Divya could contribute to Suresh’s spousal RRSP.
This would reduce her taxable income to $130,000 and reduce her available contribution room to $10,000. Since the contribution was under Divya’s name, Suresh would still have $13,000 in contribution room, and would now have an RRSP worth $20,000.

Spousal RRSP’s also offer the flexibility of allowing regular contributions. If Suresh was now working and wanted to use up some of his $13,000 RRSP room, he could contribute to his same $20,000 RRSP, but use the contribution against his own income and RRSP room.

It’s important to make sure that each contribution is designated as either spousal (i.e. a contribution made by the spouse of the plan-holder, Divya in this example), or regular contribution (a contribution made by the plan-holder or annuitant, Suresh in this example).

There are some restrictions associated with spousal RRSP’s to be aware of. Mainly, if you contribute to a spousal RRSP, your spouse cannot withdraw from that plan in the year you contributed or the next two years. If they do so, that income will be included on your tax return, not theirs. An exception is the Home Buyers’ Plan, which I’ll get to in a minute. Otherwise, the withdrawals are treated the same as for a regular RRSP.

Spousal RRSP’s used to be very popular before retirement income splitting came into play. Before pension splitting came into effect, spousal RRSP’s were used as a tool to attribute savings from a higher income earner to the lower-income earner in retirement. The income is spread out across both spouses and reduces their taxes.

Now that pension splitting is available, spousal RRSP’s have less use. However that doesn’t mean there are no longer uses for Spousal RRSP’s.

Today, Spousal RRSP’s are used for a variety of reasons:

For those who are concerned that a new government will reverse pension splitting, which was made available in 2007, the spousal RRSP eliminates that worry.
For couples with diverse income looking to purchase a new home, the higher income earner can contribute to a spousal RRSP and use up to $50,000 under the home buyers plan for a jointly purchased house. Home Buyers Plan withdrawals don’t fall under the same 3 year withdrawal restriction as regular withdrawals.
For individuals on maternity or paternity leave, they may take the opportunity to split income by withdrawing from the RRSP while their income is low (or zero) and not paying tax on that income (while their spouse received the tax deduction previously).Of course, this requires some forethought since the contributions have to be held in the plan for 3 years before withdrawing. You should also only be using this option if the higher earner doesn’t plan on maxing out their RRSP in the future, since they cannot get that RRSP room back after the withdrawal.
Finally, retirement income splitting is only available for certain types of income. Withdrawals from RRSP’s, RRIF payments before age 65, CPP and OAS income don’t count. So for couples looking to retire before age 65, having assets in both spouse’s RRSP’s will allow them to withdraw equal amounts of income, effectively splitting their income for tax purposes.

Has this helped to clear up any confusion around Spousal RRSP’s? Do you still have questions? If so, let me know in the comments below.