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Spousal RRSP Tips

ImageA Spousal RRSP is tool that allows a forward-thinking couple to legitimately minimize their taxes during retirement. If you are a couple, and intend to remain so, and you plan to retire with as much of your hard earned income as possible, then you should seriously consider this.

If you are single, or not in a long-term committed relationship, this is not for you. Note that spouse includes common-law and same-sex couples.

Still with me? Then this is for you...

How It Works

Buying spousal RRSP's means you put money into an RRSP in your spouse's name, and you get the tax credit for it. If they were to withdraw the money from the RRSP within three years, you get taxed on it as income. After three years, if they withdraw the money from the RRSP, they get taxed on it as income.

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Out Of Balance
This is useful when one of you has more in their RRSP than the other, or has a pension or some other retirement income. If left in this out of balance situation, one person will have to pay significantly more tax than their partner.

Using a spousal RRSP allows you to adjust the balance, so as to balance out your retirement incomes and each of you pay no more tax than you have to.

I have seen couples where one of them puts loads of money into their own RRSP. What will happen when they retire is that they will be pushed in a higher tax bracket because of all the RRSP income they have, while their spouse pays little or no tax. If they were to balance their RRSPs a bit more, their overall tax bill would be reduced.

Another application of the spousal RRSP is if you plan to buy a house, at least three years in the future and would like to take advantage of the Home Buyers Plan (HBP). Each spouse can withdraw up to $20,000 from their own RRSP. If one spouse does not have enough funds in their RRSP, and their spouse has the funds to contribute via a spousal RRSP contribution, they can top up their partner's  RRSP so that both have the maximum $20,000 to withdraw.

You may contribute as much as you wish to your RRSP + your spouse's RRSP, up to your annual limit. For example, if your contribution limit is $5,000, you might decide to contribute $3,000 to a spousal RRSP and $1,00 to your own RRSP.

Contributions to a spousal RRSP do not affect your spouse's ability to contribute to their own RRSP. Tip: keep the plans separate to avoid possible taxes on withdrawals.

For most Canadians, an RRSP is the best tax-saving, income-building route to a comfortable retirement. And a spousal RRSP makes a lot of sense for income splitting - dividing your income with your spouse so that you end up paying less tax on the whole amount.

People often make the mistake of leaving this step until they're nearing retirement, and by that time it's too late. Good planning today will help reduce the tax you pay later. To determine whether it's a good idea to contribute to a spousal RRSP, calculate your and your spouse's income at retirement. If there's a significant difference between these figures, it would be best for both of you to contribute to the RRSP of the spouse with the lower estimated income.

Pat

As always, this is intended for information purposes only,
and in no event should be considered or used as professional tax advice.

 
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