Did you know that you can contribute to a spousal* registered retirement savings plan (RRSP)– in addition to your own? When you do this, you can:
- help your spouse build their retirement nest egg, and
- potentially lower the amount of tax that you pay collectively.
Wondering how it works? Here’s a breakdown of what a spousal RRSP has to offer.
- What is a spousal RRSP and how does it work?
- How can a spousal RRSP give you a tax break now?
- How can a spousal RRSP give you a tax break later?
- What are the rules for spousal RRSP contributions?
- What is the cost of early withdrawals from a spousal RRSP?
- Who can help figure out your spousal RRSP options?
(*Spouse is defined by Canada Revenue Agency as married or common-law).
1. What is a spousal RRSP and how does it work?
A spousal RRSP is an investment account for your spouse’s retirement. It may help lighten the tax load for couples in their retirement. It works when there’s a disparity in income and savings levels:
- Spouse #1 has high income and a lot of money in their RRSP.
- Spouse #2 has lower income and less money in their RRSP.
By spouse #1 contributing to the spousal RRSP of spouse #2, this evens out the contributions between the accounts, while lowering the household tax bill.
2. How can a spousal RRSP give you a tax break now?
When you contribute to a spousal RRSP, you get the tax deduction. So if you earn significantly more income than your spouse, you’ll get a bigger tax break by contributing to a spousal RRSP and claiming the RRSP deduction. That’s compared to what your spouse may receive in tax savings by contributing to their own RRSP.
Remember: Your contribution counts against your own RRSP deduction limit. That’s whether you contribute to your own or to a spousal RRSP.
What is your RRSP deduction limit?
- It’s the maximum RRSP contribution you can claim as a deduction on your income tax return for the current year.
- Your contribution to a spousal RRSP won’t affect your spouse’s contribution limit.
3. How can a spousal RRSP give you a tax break later?
There can also be a tax break down the road, during retirement.
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.
What’s the result?
- The extra funds you contributed to your spouse’s RRSP allows your spouse to withdraw a bigger share of that $5,000 from their RRSP.
- And, you can now withdraw less from your RRSP.
4. What are the rules for spousal RRSP contributions?
Spousal RRSPs are subject to several rules.
After you’ve made a spousal RRSP contribution:
- The money belongs to your spouse. They control the account, make the investment decisions and generally decide when to withdraw the money. It’s taxed as their income when they meet certain conditions.
- You can contribute to an RRSP until the RRSP owner turns 71. Let’s say you're over 71 and can’t contribute to your own RRSP anymore, but your spouse is younger. In this case, you can both still benefit. If you still have RRSP contribution room, you can keep putting money in a spousal RRSP. And you have reduced your taxes while your spouse’s RRSP grows, until they turn 71.
5. What is the cost of early withdrawals from a spousal RRSP?
Spousal RRSPs are for long-term, retirement savings. They’re not short-term tax shelters. That’s why the government imposes a penalty if you withdraw money early:
- If your spouse withdraws money from their RRSP, it’s taxed at their rate.
- Except, if they withdraw within 3 years of a contribution from you, you’ll have to claim that as your taxable income, not your spouse’s.
Contributions must remain in the spousal RRSP for the:
- remainder of the current year, and
- next two calendar years* to avoid counting that 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.
6. Who can help figure out your spousal RRSP options?
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. You may want to talk to an advisor to:
- help you make good financial decisions,
- help ensure you’re growing your savings to meet your goals and needs, and
- answer questions or address any concerns you may have.
Most advisors now offer to meet Clients virtually by video chat. Find an advisor today.
- 6 things you may not know you can do with your RRSP
- What will you do with your RRSP when you turn 71?
- How to budget as a couple
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.