Do you have a registered retirement savings plan (RRSP)? You may already know that RRSPs:

  • let you hold various investments (e.g. bonds, mutual funds, etc.),
  • offer tax-deferred savings (meaning that your investments grow tax-free until you start withdrawing funds), and
  • are ideal for long-term savings such as saving up for your retirement.

But did you know that you can also contribute to your common-law or married spouse’s RRSP? In doing so, you can help your spouse or partner build their retirement nest egg. At the same time, you can lower the amount of tax that you pay collectively. Here’s a quick breakdown of what a spousal RRSP has to offer and how it works.

1. A spousal RRSP can give you a tax break now

That’s because when you contribute on behalf of your spouse, you get the tax deduction. So if you earn significantly more than your spouse, you’ll get a bigger tax break by contributing to a spousal RRSP, than your spouse would by contributing to his or her own RRSP.

Whether you contribute to your own or to a spousal RRSP, your contribution counts against your own RRSP deduction limit.

Your RRSP deduction limit is the maximum RRSP contribution you can claim as a deduction on your income tax return for the current year. Your spouse’s contribution limit isn’t affected, however, by your contribution to a spousal RRSP.

2. A spousal RRSP can also give you a tax break later

There can also be a tax break down the road, during retirement.

As an example, let’s say that you’re the spouse with the higher income and you need to withdraw a total of $5,000 a month, as a couple, from your RRSPs. Thanks to the additional funds you’ve contributed, your spouse can withdraw a bigger share of that $5,000 from their RRSP. This will allow you to withdraw less from yours. Here’s how this could result in an income tax reduction for your family in total:

Total income tax
You withdraw the entire $5,000 per month x 12 = $60,000, taxed at 26% $15,600
You withdraw $4,000 per month x 12 = $48,000, taxed at 26% $12,480
Your spouse withdraws $1,000 per month x 12 = $12,000, taxed at 15% + 1,800
$14,280 *

* This is only an example. Please consult a tax specialist to see how it can best work for you.

3. There are specific rules for spousal RRSP contributions

Spousal RRSPs are subject to a number of rules. After you’ve made a spousal RRSP contribution:

  • The money belongs to your spouse. They control the account and when the money is withdrawn, it’s taxed as their income as long as certain conditions are met.
  • You can contribute to an RRSP until the RRSP owner turns 71. Let’s say you're over 71 and can no longer contribute to your own RRSP, but your spouse is younger. In this case, you can both still benefit. If you still have earned income and RRSP contribution room, you can keep putting money in a spousal RRSP and defer your taxes while your spouse’s RRSP grows, until they turn 71.

4. Early withdrawals from a spousal RRSP can be costly

It’s important to remember that spousal RRSPs are meant for long-term retirement savings, not short-term tax shelters. That’s why the government imposes a penalty if you withdraw money within three years of contributing to a spousal RRSP.

Generally speaking, if your spouse withdraws money from their RRSP, it’s taxed at their rate. But if your spouse withdraws money within three years of a contribution from you, you’ll have to claim that withdrawal as your taxable income, not your spouse’s.

Contributions must remain in the spousal RRSP for:

  • the remainder of the current year
  • and the next two calendar years to avoid being counted as income for the contributing spouse.

The date is based on calendar years, not three years from the last spousal RRSP contribution.

As an example, let’s say you’ve contributed a total of $40,000 to your spouse’s RRSP. And, you contributed $5,000 of that $40,000 over the last two calendar years.

  • If your spouse withdraws $9,000 this year, $5,000 of that will be taxed as part of your income. Why? Because you contributed that amount in one of the two calendar years before the year of the withdrawal.
  • The remaining $4,000 will be taxed as part of your spouse’s income.

When you’re considering a spousal RRSP, it’s important to look at your and your spouse’s current financial circumstances, and project what they might look like at retirement. As everyone’s financial circumstances are different, it’s always a good idea to consult a financial professional.

  • Need help getting started? You may want to consider talking to an advisor. They can help you make good financial decisions and ensure you’re growing your savings to meet your goals and needs. They can also answer questions or address any concerns you may have.

More on RRSPs and family finances:

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This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.