With the new year comes new RRSP considerations. Your mind shifts to thinking about your Registered Retirement Savings Plan (RRSP) and the ability of it to lower your tax burden. And here’s more to think about: Did you know that you can also set up a spousal RRSP for your common-law or married spouse?
This is an ideal option when one partner in a relationship has a much higher income compared to the other. The person making the spousal RRSP contribution would get a tax deduction that helps lower their specific tax bill for the year.
Eventually, when the money is withdrawn from the spousal RRSP, the lower-earning partner gets taxed at a lower marginal tax rate. That means, as a couple, you could pay less tax overall during your retirement years. Read on for answers to key questions that can help you decide if a spousal RRSP is right for you:
What is the difference between an RRSP and a spousal RRSP?
“Similar to a traditional RRSP, a spousal RRSP is a registered account meant for retirement savings,” says Colleen Ciccozzi, Senior Manager, Wealth Programs at Coast Capital. “The main difference is that with a spousal RRSP, one spouse is the owner of the account, while the other is the contributor.”
Having a spousal RRSP doesn’t mean you get additional contribution room. The RRSP contribution amount that you have available applies to all accounts combined. For example, if you have $27,000 in contribution room available, that’s the total amount you can contribute between your personal RRSP and spousal RRSP.
Is a spousal RRSP a good idea?
“The advantages of a spousal RRSP are obvious,” says Barry Choi, a personal finance expert at moneywehave.com. “It gives couples an opportunity to push retirement income from a high tax bracket spouse into the hands of the spouse in a lower tax bracket.”
While the benefits are clear, setting up a spousal RRSP doesn’t make sense for all couples. Since the main advantage is lowering the tax burden between couples, it’s ideal when one spouse earns significantly more than the other. “That’s because the disparity of their current income would likely translate to something similar in their retirement years if they kept their retirement savings separate,” says Choi.
Another situation that makes sense for using a spousal RRSP is when one spouse plans to keep working past the age of 71 and the other spouse is younger. Since the contributing spouse must start withdrawing from their retirement account by December of the year they turn 71, they can still lower their tax burden by contributing to their spousal RRSP.
What are the spousal RRSP withdrawal rules?
As mentioned, and similar to a traditional RRSP, your spousal RRSP must be converted to a Registered Retirement Income Fund (RRIF) by December of your 71st year. You’ll then be required to withdraw a minimum amount that’s set by the government every year. Those withdrawals are taxed at your marginal tax rate.
“It is possible to make early spousal RRSP withdrawals, but the Canada Revenue Agency has a rule where contributions can’t be withdrawn for three calendar years from the time of the initial deposit,” says Ciccozzi. “If you do need to withdraw before the three-year window, it would count as income on the contributor and they would be taxed on it,” she continues.
For example, let’s say a spousal contribution of $3,000 was made in 2019. To avoid having the money added back as income to the contributor, the spouse wouldn’t be able to withdraw the funds in 2019, 2020, or 2021. Come 2022, they would be able to withdraw the funds early, but the usual withholding tax rules would apply.
- 10% withholding tax on withdrawals up to $5,000
- 20% withholding tax on withdrawals between $5,000 and $15,000
- 30% withholding tax on withdrawals over $15,000
Can a personal RRSP be transferred to a spousal RRSP?
It’s quite common for many people to have their own RRSP before meeting their partner and getting a spousal RRSP set up. Fortunately, you can combine them into a single plan. That said, once combined, it’s considered a single spousal RRSP.
While combining things will make retirement planning easier, you would need to carefully track which partner is making the contributions for tax purposes.
What are other spousal RRSP considerations?
“Under current tax law, couples over the age of 65 can choose to split up to 50% of the income from their RRIF accounts for tax purposes,” says Ciccozzi. “Because of this change in tax law, spousal RRSPs are not as common as they used to be but are still a good vehicle if couples wish to see assets in each spouse’s name.”
One last note: You can also consider spousal RRSPs for reasons outside of retirement. For example, if one spouse decides to stay home with the kids or go back to school, contributing to a spousal RRSP in advance will allow that person to withdraw money while they’re unemployed and pay only a small amount of tax on it. This in turn affords the contributing spouse some tax savings at the same time.
If you’d like to set up a spousal RRSP, talk to a financial advisor who can guide you on your particular situation.