Spousal RRSPs

What are Spousal RRSPs?

Spousal RRSPs are Registered Retirement Savings Plans available for married and common-law couples. Similar to an individual RRSP where the account is set up to invest in that person’s future, a spousal RRSP allows couples to invest and save for each of their futures.

RRSP FAQ, and general information, can be found in KATA RRSPs FAQ.

Common law or married couples living in Canada are allowed to register an RRSP in the name of their spouse. For instance, when one partner is earning more income than the other, they have the option to contribute to their spouse’s RRSP and plan to split their retirement income once both individuals are over the age of 71.

Alternatively, they can choose to convert their RRSP to an RRIF, initiating the process of receiving their retirement income. When couples make a similar amount of income, it would not make sense for them to open a spousal RRSP because there would be no tax advantage on even sets of income.

Who should use Spousal RRSPs? 

Any couple where there is a disparity of income between the two. One partner is generating more income than the other and has higher contribution room to invest in their partner’s retirement.

The higher-earning spouse will get the tax deduction of an RRSP contribution now (which counts against their RRSP contribution limit), but the lower-income spouse will take the retirement income down the road. It’s kind of like splitting future income.

Why use a Spousal RRSP?

When there is a significant difference in income between a married or common-law couple, a spousal RRSP creates an option to retire with an even amount of taxable income. With each contribution made to a spousal RRSP, the contributor benefits from a deduction on their taxable income.

When the couple enters retirement and begins to draw income from their RRSP, this income is subject to a more balanced tax rate, leading to a reduced overall tax liability for the couple.

How do Spousal RRSPs Work?

  1. There is an owner and a contributor
    1. The owner is the one to whom the RRSP is registered. Generally, this should be the spouse with a lower taxable income and a lower tax bracket.
    2. The contributor takes the RRSP deduction on their taxes.  This should be the one with a higher tax bracket.
    3. An owner manages the funds within the RRSP, investment decisions, and when they want to withdraw funds. The owner’s name is registered to the RRSP.
  2. The contributor can contribute 18% of their earned income up to a maximum of $30,780 (for 2023)
    1. Each time a contribution is made, the contributor is allowed to deduct these amounts from their personal tax return.
    2. The contributor must stay within their contribution limit – this information can be accessed online through their CRA Portal or by contacting the CRA at 1(800)959-8281. (KATA Accounting strongly recommends that everyone registers for CRA My Account to gain understanding of their tax matters better. It’s your money, and it’s your right and responsibility to care for it).
    3. Once a contributor makes a contribution, they lose ownership of their assets as they transfer them to the owner of the RRSP.
    4. The owner can make contributions until the end of the year they turn 71. This age limit does not apply to the contributor to the RRSP. As an example, if one spouse is 72 and is the contributor, and the other spouse is 50 and is the owner, the owner’s RRSP is still open to contributions until they are 71.
  3. Couples should speak with their accountant and their financial advisors and determine a strategy based on their annual income, contribution levels, goals, and overall family strategy.
    1. Some questions that couples can ask themselves are:
      1. Do RRSPs make sense for our family situation?  RRSPs are not the best vehicle for everyone.
      2. Who should be the owner and who should be the contributor to which RRSP?
      3. Should we use other registered programs, and what is the right blend for us?

Advantages and Disadvantages of Spousal RRSPs

Finance author Andrew Goldman wrote an article for Wealthsimple Financial Instruments describing spousal RRSPs and acknowledging their advantages and disadvantages. The link to the article can be found here: WS Spousal RRSPs

Withdrawals and the Three-Year Rule

After making contributions and having an adequate amount for withdrawal, spouses should consider the tax implications in their decision-making process.

If the owner of the spousal RRSP intends to withdraw income from their RRSP before turning 71, there is a possibility that the contributor’s contributions are taxed on. When a withdrawal occurs within three years of a contribution, the contributor will be taxed based on the amount contributed during the timeframe.

As an example, if a spouse wanted to withdraw funds in 2024, contributions made in 2023, 2022, and 2021 will be taxable. Contribution made in 2020 or earlier will not be taxable and the owner will be taxed on the remaining income.

For example, John Doe withdraws $10,000 from his spousal RRSP on Feb 5th, 2024. Jane Doe has made contributions of $2,000 each year for the last three years into John’s account. $6,000 will be taxable from Jane’s contributions and $4,000 will be taxable from John’s withdrawal.

Strengthen Your Financial Journey

These are some of the complexities of financial planning and KATA Accounting Solutions is here as your trusted partner. Reach out to us. Our team is ready to assist you to create a strategic plan for your collective future. Remember, proactive planning today ensures a more secure tomorrow.

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