What a Spousal RRSP is and When to Use It
Saving your money in a Registered Retirement Savings Plan (RRSP) allows you to avoid paying taxes on income today. Instead, you pay taxes later when you withdraw the money. A spousal RRSP is similar. However, instead of you paying taxes later, your spouse pays the taxes.
If your spouse pays a lower tax rate than you, a spousal RRSP can help. For instance, if you earn $85,000 per year and your partner earns $40,000, you’d pay 32% in taxes while your partner would pay 20%. If you withdraw $10,000 from an RRSP, you’d pay $3,200 in taxes. However, if your partner withdraws $10,000, they’d pay $2,000. Therefore, you’d save $1,200 by using a spousal RRSP.
Rules when using a spousal RRSP
Contribution room
You can deposit to a spousal RRSP using your available RRSP contribution room. To illustrate, consider a married couple of Jennifer and Jared. Jennifer earns $85,000 per year, and Jared earns $40,000. If Mary has $20,000 in contribution room, she could contribute $10,000 into a spousal RRSP for Jared. This way, Mary would avoid paying taxes on the $10,000 income today, and Jared would instead pay taxes on the withdrawal.
Timing of withdrawals
For the withdrawal to be taxed in Jared’s name, he must wait three years before withdrawing the money. If Jennifer deposits $10,000 into the spousal RRSP in 2020 and Jared withdraws the money in 2020, 2021 or 2022, then Jennifer would need to pay the taxes on the withdrawal. Jared would need to wait until 2023 or later for the withdrawal to be taxed in his name.
When to use a spousal RRSP
Spousal RRSPs used to be more common because they allowed couples to split their income in retirement. Rather than one person having a large retirement account, couples were able to split the savings between a regular RRSP and a spousal RRSP. However, since 2007, this is no longer necessary. You can now split pension income (e.g., RRSP withdrawals) in retirement with your spouse without needing to use a spousal RRSP.
While this limits the need for a spousal RRSP, there are still cases where the account is beneficial. We’ll review three examples below:
If you experience a year of low income ahead of retirement.
If you want to use the Home Buyers’ Plan (HBP) to help buy your first home.
If you want to retire and split income before the age of 65.
Low income ahead of retirement (Use Case #1)
Occasionally, you may find yourself with a lower income for a year. Perhaps you:
Are going back to school.
Have taken maternity or paternity leave.
Are in a career transition.
Have started a new business.
In these cases, it may make sense to withdraw money from a traditional RRSP or a spousal RRSP. If you have little or no income for the year, a withdrawal from an RRSP will allow you to keep most of the money. To illustrate, let’s consider a case where you plan to go back to school in 4 years and don’t expect to earn income for a full calendar year. You could deposit money to an RRSP, or your spouse could deposit money to a spousal RRSP in the years leading up to your school. Once you’re in school, you could withdraw money to fund your expenses without paying high taxes.
Remember that you’ll need to wait three years after the most recent deposit before withdrawing.
Buying your first home (Use Case #2)
If you’re starting to save for your first home, you may consider using your RRSP to help. If there’s one high-earner in your couple, that individual could contribute to their RRSP and a spousal RRSP. This way, both partners could withdraw $35,000 through the Home Buyers’ Plan (HBP), providing up to $70,000 for a down payment.
Early retirement (Use Case #3)
While the government has made it easier to split your pension income with your spouse in retirement, you’re not able to do this until you turn 65. Therefore, if you want to retire earlier and start receiving money from an RRSP, you may benefit from a spousal RRSP.
Closing remarks
While spousal RRSPs are less common than they used to be, there are still times when they come in handy. Spousal RRSPs are another example that shows how complicated the tax system is in Canada. This complication causes millions of Canadians to miss out on available incentives each year. You can learn more ways to minimize your taxes or work with an accountant or financial planner to help.
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