Spousal registered retirement savings plans (RRSPs) are a way Canadian couples can split their income and pay less tax in retirement. Think of it as an investment account for your spouses retirementβyou make the contributions now and get the tax deductions, your spouse takes income from it later and pays the resulting income tax.
With a regular RRSP the plan is registered in your name, youβre the one contributing money to it, and you control how itβs invested. With a Spousal RRSP youβre still the one contributing money to it but the plan is registered in your spouses name and they control how itβs invested. It belongs to them, not you, even though youβre the one making the contributions and getting the tax refund.
Spousal RRSPs can be helpful for couples (married or common-law) who have a large gap between their incomes. Letβs say you make $100,000 a year and your partner makes $20,000. Youβll be racking up much more RRSP contribution room than your partner (18% of $100,000 versus 18% of $20,000) so youβre able to put more money into your RRSP than your partner is.
If things carried on like this, by the time you got to retirement you would have a big pile of money in your RRSP and your partner would have a much smaller pile in theirs. Youβd have to withdraw more money each year and pay more tax than your spouse.
The spousal RRSP lets you use your contribution room to put some money into your RRSP and some into a spousal RRSP for your partner. That way when you retire youβll have similar sized piles of money in your RRSPs, youβll both be in lower tax brackets, and youβll pay less income tax overall. Three cheers for paying less tax, right?
Spousal RRSPs can also be useful if that spouse is planning to stay at home with the kids for a few years or go back to school. While unemployed, they can withdraw money from their spousal RRSP and pay a little bit of tax on it (you just have to be careful of attribution rules, which weβll get into below!).
Similar to the RRSP, if youβre a first-time home buyer you can take advantage of the Home Buyersβ Plan to withdraw up to $25,000 from your spousal RRSP.
Lastly, if youβre older than your spouse you can continue contributing to their spousal RRSP up until the year they turn 71. You canβt contribute to your own RRSP past the year you turn 71, but if youβre 71 and your spouse is 61 you can keep contributing to theirs for another 10 years!
The amount you can contribute in any given year is dictated by your RRSP contribution limit, which you can find on your most recent notice of assessment (NOA). Whether youβre contributing to you own RRSP, a spousal RRSP, or both, the total amount you contribute canβt exceed your limit. If your limit this year is $20,000 you canβt go contributing $20,000 to yours and $20,000 to your spouses. Youβll want to keep good track of your contributions so that you donβt over-contribute and get hit with penalties!
While there are situations where you may want to take money out of a spousal RRSP before retirement (like if you decide to stay at home with your kids or go back to school) the account really is designed for retirement, so you have to be careful of attribution rules if you withdraw money before then. If your spouse withdraws income within three calendar years of you contributing it, itβll be attributed back to you and youβll get hit with the tax bill, not your spouse.
Finally, youβll also want to factor in any pension plans, inheritance, or other expected income sources in retirement to make sure a spousal RRSP will truly help you balance your income and lower your overall tax bill.Β
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