Spousal RRSP- 7 Practical Facts You Need To Know

April 19, 2020
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A Spousal RRSP is simply a joint account where both you and your spouse contribute to your savings for your retirement. It’s better than a regular or personal RRSP in that it will help you save on taxes. If you or your spouse has a significantly lower income than the other, you will definitely benefit from a spousal RRSP.

You’ve probably heard about how saving money in a registered retirement savings plan or RRSP can help you in your retirement. But, did you know that a Spousal RRSP has even greater benefits for you and your spouse? With a Spousal RRSP, you can divide your retirement income which also means you pay less tax as a couple throughout your lifetime.

Saving in a Spousal RRSP benefits both partners in taxes

In this post, we’ll show you 8 practical facts about the Spousal RRSP, and you’ll see how it can help you in the long run:

Fact 1: The Spousal RRSP Is Like An Investment Account

The Spousal RRSP is like an investment account for you and your partner/spouse’s retirement. This account’s biggest benefit is that it allows you to save money tax-free every year and this benefit cascades to your spouse/partner as well – they will see tax-free returns on the money they save. 

Fact 2: The Spousal RRSP Lowers Your Overall Income Tax As A Couple

The Spousal RRSP is encouraged to reduce the tax load for couples who are entering retirement. The goal of this type of retirement savings is to even out each other’s contribution so that both partners end up in the lower tax bracket. At the end of the day, this results in less income tax.

This is because if the spouse with the higher income contributes solely to their own RRSP account, by the time they retire their retirement fund will be larger than their partner’s, and therefore will be taxed at a higher income tax bracket.

On the other hand, if they contribute to their spouse’s RRSP, then they’ll both have the same amount saved overall, but the higher-earning partner’s retirement fund will be lower. As a consequence, they will fall into a lower income tax bracket, therefore, lowering the couple’s overall tax bill.

How can A Spousal RRSP Help You Save on Taxes? 

To provide more detail on how you and your partner can save on taxes, here are two main factors that make tax-saving a possibility:

  1. Couples can split their RRSP income during retirement and take advantage of lower marginal tax rates. In the case study below, Marie & Alex can pay less tax on two equal incomes rather than on one large and one small income. 
  2. When Marie contributes on behalf of her spouse, she gets a tax deduction. She gets a bigger tax break by contributing to Alex’s spousal RRSP, than Alex would by contributing his own RRSP.

Whether you are contributing to your own or to a spousal RRSP, the contribution counts against your own RRSP deduction limit- this is the maximum RRSP contribution that can be claimed as a deduction on your income tax for the year. Your spouse’s contribution limit is not affected by your contribution to the spousal RRSP. 

Here is a great example of how a Spousal RRSP would benefit a couple with different salaries and how it can help them save on taxes: 

Case Study: Marie and Alex, A Married Couple

Marie has her own business and earns a good salary of $70,000/year. Alex is a teacher who makes $30,000. So, you have a couple with one spouse who makes twice what the other one makes.

Taxes Without Spousal RRSP

Let’s see how much they would have to pay in taxes as a couple if they both contribute to their personal RRSPs separately and receive the same annual income after retirement. You can find the current federal income tax rates for 2020 here, but we’ll round out the numbers to make things easier to follow. These are the rates we will use for this example, for the sake of clarity:

  • 15% on the first $50,000
  • 25% on the portion that exceeds $50,000

Upon retirement, this is what each would have to pay:

RRSP Income/withdrawal before taxes ($)Tax Rate (%)Tax Payable
Marie70,00015% on the first $50,000
25% on the other $20,000
7,500 + 5,000=12,500
Total as a Couple100,000Effective Tax Rate: 17%17,000

So, during the year, Marie and Alex will receive an income of $100,000 as a couple and will have to pay $17,000 in taxes if they both contribute to their RRSP accounts separately. Marie’s savings are taxed into a higher income bracket, obviously because of her higher income.

Taxes With Spousal RRSP

Now, let’s suppose Alex, the one with the lower income, opens a Spousal RRSP, and that instead of contributing to her own RRSP, Marie decides to put all her savings for retirement into Alex’s spousal RRSP.

They’ll have the same amount saved for their retirement, so they’ll be able to withdraw the same $100,000. However, they can now split that income evenly, receiving $50,000 each, instead of $70,000 and $30,000. Let’s see how much they’ll have to pay in taxes now:

RRSP Income/withdrawal ($)Tax Rate (%)Tax Payable
Total as a Couple100,000Effective Tax Rate: 15%15,000

Since the income is split, Marie’s income now falls into the lower tax bracket, while Alex’s doesn’t increase past it. With the Spousal RRSP, Marie and Alex now pay $2,000 less in taxes than they would otherwise.

Fact 3: You Can Lower Your Taxes, Even More, Depending On Who Owns The Account

Ideally, it would be good to register the Spousal RRSP account under the name of the partner/spouse who makes less in income. This will make them the owner of the plan and the only one who is allowed to withdraw money. When they do, they will be taxed at their own income bracket because their funds come from their spouse, not from their own income. Meanwhile, the sole responsibility of the spouse/partner making a higher income is to contribute to the account.

Fact 4: In Canada, Spousal RRSP Accounts Are Bound To A 3-Year Attribution Rule

When you start investing in a Spousal RRSP, you are bound by Canadian law to a 3-year attribution rule. This means you are not allowed to withdraw money within the first three years from the date of your first deposit. If for some reason you withdraw within those three years, this money turns into taxable income for the spouse who is contributing. 

Fact 5: Your Contribution Limit Is Split Between Your RRSP And Your Spousal RRSP

The limit for RRSP contribution is the same regardless of you having one or more RRSP accounts. Say, for instance, your contribution limit for this year is $30,000. If this is the case, you have to divide this amount between your RRSP and the Spousal RRSP. You can put in equal amounts in both or, $20,000 in one and $10,000 in the other. However you choose to split the contribution, just make sure you do not go over the limit. 

Fact 6: Spousal RRSPs Can Be Converted Into RRIFs

You can keep adding to the Spousal plan until the time your spouse turns 71 years old. RRSPs can then be converted into retirement income products such as annuities or RRIFs (Registered Retirement Income Funds) when you turn 71 years old. When this happens, the retirement income is taxed on the lower-earning spouse at their current tax bracket. This could help you and your spouse save a lot in income taxes.

Fact 7: Spousal RRSPs Do Have Disadvantages

  • Your contributions cannot be withdrawn within the first three years from first deposit made
  • Three Year Attribution Rule- Any contributions withdrawn within the first three years is tax deductable
  • The management fees charged on RRSPs can eat into the amount you contribute
  • Large banks have higher management fees for Spousal RRSPs

Keep in mind that the Canadian government has a list of tight regulations set up to prevent any abuse of Spousal RRSP, specifically for tax evasion. Because of this, it can be a little complicated to navigate your accounts. For instance, the RRSP contribution limit does not change if you have two accounts so you can’t max out your early contribution on your RRSP and then max out on your spouses’ one after that. 

Either way, the RRSP is a good way to start on your retirement savings, if you haven’t already. It provides tax benefits and gives you peace of mind because of these savings. Even better, it makes it easier to make pre-retirement plans between you and your spouse when you have money for your retirement- plan a vacation, buy a boat, travel somewhere, you have more options when you know how much you have saved up.

Fact 8: Taking Advantage of Age Difference

If your spouse is younger to you, you can continue to contribute to their spousal RRSP until the end of the year your spouse turns 71, provided that you still have RRSP contribution room available. This means that you can save even more for your retirement with the spousal RRSP. For example, if your spouse is 10 years younger than you, you can continue to contribute to his or her spousal RRSP for an extra 10 years, whereas you will no longer be able to save on your own RRSP. 

Additionally, if you are in a higher tax bracket than your spouse at the time of the spousal RRSP, the spousal RRSP deduction will save you more in taxes than if your spouse made the contribution because they will be taxed at their tax bracket and not yours.

Spousal RRSP vs. Pension Splitting

Many Canadians wonder why we should bother with a spousal RRSP when pension splitting gives similar benefits. This is true in some cases, but there are still many situations in which you can benefit even more from a spousal RRSP than from pension splitting.

What is Pension Splitting?

For individuals who are 65 years and older, they can allocate 50% of their annual income for tax purposes. This annual income can come from a lifetime annuity, an RRSP annuity, a registered pension plan, a registered retirement income fund (RRIF), or from a deferred profit-sharing plan annuity and goes to a spouse or common-law partner.

The actual income is still received by the individual, the splitting, however, is for tax purposes and is done via a tax return.

The receiving partner does not need to be 65 years or older to get this allocation. Also, the amount of allocation can be revised each year to benefit the couple. This greatly benefits senior couples.

For couples under the age of 65, pension splitting is applied to those who receive lifetime annuity payments that come from a registered pension plan. RRIF income cannot be split under the age of 65.

When Is A Spousal RRSPs Better Than Pension Splitting?

For those above the age of 65, spousal RRSPs may not be very beneficial compared to pension splitting, especially with the changes in pension splitting plans which came into effect in 2007. If you want to retire before 65, on the other hand, a spousal RRSP is the only real option you have if you want to save on taxes. Spousal RRSPs are a way to allow a spouse that is higher in marginal tax rates to be able to contribute to a spousal RRSP towards the spouse with the lower income. 

Another key difference between spousal RRSPs and income splitting is that, through the latter, you can only split 50% of your income while with the spousal RRSP, you can max out your full RRSP room on your spouse’s account, therefore getting your full RRSP income in the lower tax bracket. In the case of Marie and Alex, Marie contributes to Alex’s spousal RRSP instead of her own. This way, when Alex withdraws the money, he pays the tax instead of Marie (so long as they follow the 3-year attribution rules).

To benefit from a Spousal RRSP means to plan ahead for retirement, which is why a spousal RRSP benefits couples younger than 65 years old. That said, a person who is 60 years old or younger shouldn’t randomly assign some of their RRSPs to a spousal RRSP on a whim. This action needs to be done at the time of contribution, preferably a few years prior to retirement and before the RRSP deadline. In other words, start early and don’t wait to plan for retirement when it may be too late.

Another scenario in which you can greatly benefit from a spousal RRSP is if one of the spouses is a lot younger than the other because in this case the older one can keep contributing after turning 71 and save even more for retirement.

Finally, spousal RRSPs allow you to double the amount you can withdraw tax-free to buy a home, even if your spouse has taken some time off work and isn’t making any income.

Should You Get A Spousal RRSP?

Why wouldn’t you want to? This type of savings account is beneficial for married or common-law couples saving up for retirement. Couples can split their income once they retire, thus reducing their tax load. The ultimate goal is to even out both partner’s retirement savings so when you retire, you both can withdraw the same amount of money from your RRSPs. 

This benefits couples where one of them earns a higher amount of money, partners where one spouse stays at home, partners where one has taken time off from their career to go back to school, and so on. 

If you are looking for a bank that offers RRSP savings, check out posts here on:

The Bottom Line On Spousal RRSP

RRSPs have a lot of benefits, but spousal RRSPs have even more:

  • You can balance out your contributions between spouses
  • If one of you makes more income than the other, they can get on a lower tax bracket which means you pay fewer taxes as a couple
  • An early contribution to a spousal RRSP allows one partner to withdraw money while unemployed and pay little taxes
  • It saves the contributing spouse from paying more tax money
  • You can use the Spousal RRSP to keep saving for retirement and to save on taxes after the age of 71
  • You can make a contribution on behalf of your spouse and claim a tax deduction on that money
  • If you die, your estate can contribute money to the RRSP account to provide some tax-free inheritance

As you can see, spousal RRSPs are a great way for couples to save for retirement while at the same time-saving money on taxes. They’re the perfect choice for couples with very different incomes and different ages. If you and your spouse or common-law partner fit either or both of these attributes, don’t hesitate and start planning for your financial future today.

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