Spousal RRSP: What Is It and How Does It Work?

If contributing money to your RRSP isn’t enough for you, how about adding to your partner’s retirement plan? Luckily, Canada has a slew of beneficial plans to provide you with tax benefits, and one of them is the spousal RRSP.

But what kind of plan is this, and how does it work? Stick around and let’s find out!

What Is a Spousal RRSP?

A spousal RRSP is a Registered Retirement Savings Plan that allows you to save for your spouse’s retirement. It’s an excellent way for couples to lighten their tax loads in the present and their retirement. Even though it’s called “spousal”, this plan is also open to common-law partners. 

What draws people most to this plan is that the money in the RRSP grows tax-free until you withdraw it, at which point your spouse will begin paying taxes on it. Moreover, by contributing, you become eligible for tax deductions. 

Generally, the spousal RRSP is an excellent choice for couples with significant income disparities. Namely, if one partner earns a higher income, they can use their RRSP contribution room to invest in their spouse’s retirement plan. By doing this, both you and your spouse will have less tax owing overall. It’s a win-win!

How Does a Spousal RRSP Work?

If you have this type of RRSP, you can contribute to it just like any other RRSP. Usually, the higher earner opens and adds money to the plan. As we mentioned, spousal RRSP contributions are tax-free, and when your spouse or common-law partner retires, they will pay taxes on the money withdrawn.  

As you know, if you contribute to your RRSP, you can deduct the contribution from your taxes. However, if you contribute to your spouse’s RRSP, you can also deduct this contribution. Therefore, you’re saving on taxes in the short term. 

Since this plan is in your partner’s name, they are the only ones that can make investment or withdrawal decisions. Just because you contribute doesn’t mean you have a right to the money in the plan. To get the full image, we’ll go over the spousal RRSP rules:

• Spousal RRSP attribution rules state that the annuitant (account holder) can’t withdraw their money for at least three years after the date they were put in the account, but if they do, the money becomes taxable income
• RRSP contribution limits are the same regardless of the number of accounts you have
• You can convert your RRSPs into retirement income products like RRIFs and annuities

Spousal RRSP vs RRSP

To get a complete picture of the plan, we’ll compare the personal RRSP with the spousal RRSP. 

The main difference between these two plans is the ownership of the account. With the former, the account holder contributes and is taxed upon withdrawal. Meanwhile, with the latter, the person that contributes isn’t the same one who owns the savings and will be taxed with the latter. 

Furthermore, if the higher-earning partner wishes to retire earlier, they can still contribute to their spouse’s RRSP, whereas they won’t be able to put money into their personal RRSP. 

However, if you receive a pension or another type of retirement earnings, an RRSP might not give you as much tax deduction, as you’re already in a lower tax bracket. In this scenario, a TFSA might be the optimal solution.

Contributing to a Spousal RRSP

Next, we’ll discuss how contributing works. Here, we’ll mention the benefits of opening a joint RRSP as well as the contribution rules you need to remember. 

Why Should You Contribute?

Unsurprisingly, there are many benefits of spousal RRSPs. Below, you will discover why couples are encouraged to open this type of savings plan. 

Income Splitting

One of the main reasons to contribute to a spousal RRSP is income splitting. Namely, this means that you can add money to your spouse’s plan and deduct the contribution from your own taxes. Therefore, this is an excellent way to save on taxes, especially if one spouse has a higher income than the other. 

By contributing, you can equalize your incomes in retirement and pay less tax overall because you’ll be placed in a lower tax bracket. So, if one person has an income of $100,000, they’ll be in the highest tax bracket. However, if they split with their partner, they’ll both have an income of $50,000, thus settling in a lower bracket. 

Buy a Home

A joint RRSP can significantly help you and your partner save up to buy your first home together and maximize the Home Buyers’ Plan (HBP). This plan allows future homebuyers to withdraw up to $35,000 from their RRSPs. Therefore, since a couple has spousal and individual RRSPs, they can withdraw $35,000 from each account, free of taxes.

Furthermore, this can be a helpful way to come up with the money for a down payment on a home. Moreover, when the time comes to repay the HBP, the spouse with the lower income can opt out of the repayment, thus having little or no tax to pay.

Plan for Children

If you and your spouse plan to have children, contributing to this RRSP can be an excellent option. Namely, if the lower-earning spouse takes parental leave, they can use the funds from their spousal RRSP to help with childcare costs. Meanwhile, the higher income earner can continue contributing and benefit from a tax break of up to 50%. 

Retire before 65

If the higher earner retires before the age of 65, they will not be able to split the income from their RRSP or RRIF until they turn 65. However, if the higher earner makes spousal RRSP contributions, their spouse can withdraw the money without needing to be a certain age. Therefore, this plan gives couples the much-needed flexibility to withdraw whenever.

Contribute beyond 71

When you reach the age of 71, you can no longer contribute to your own RRSP. However, you can still do so to your joint RRSP until your spouse also turns 71. So, you can continue saving for retirement and benefiting from tax deductions even after you’re done with adding money to your personal plan. 

Spousal RRSP Contribution Rules

Before you open your new account, you should know the rules of spousal contribution to ensure you’re not setting yourself up for penalties. Here’s what you keep in mind:

• The spousal RRSP contribution limit is 18% of your annual individual earned income, up to a maximum of $27,230 plus contribution room from previous years
• The annuitant has the right to withdraw money and make investment decisions regarding the RRSP, and it is also taxed as their income 
• The contributor can add money to the account until the annuitant turns 71

Spousal RRSP Withdrawal

Finally, we’ll go over the withdrawal procedure, the rules, and the transaction cost. 

Withdrawal Procedure

The procedure for withdrawing money from a spousal RRSP is the same as a regular RRSP. You can withdraw funds from the account at any time, but you will have to pay taxes on the withdrawal because the money is now taxable income. However, you may be able to avoid paying taxes on the withdrawal if you roll the money into an RRIF.

Note that the minimum RRIF withdrawal depends on the individual’s age and ranges between 4.00% at 65 and 20.00% at 95 and older. In contrast, spousal withdrawals are generally included in tax returns, which you should calculate yourself. 

Withdrawal Rules

Before withdrawing, you need to familiarise yourself with the spousal RRSP withdrawal rules, which state that:

• The withdrawn money is taxed at the rate of the spouse whose name is on the account
• If you withdraw the money within three years of contribution, it will be your taxable income and not your spouse’s
• You can’t contribute to a spousal RRSP at one institution and withdraw from another
• There is no minimum withdrawal amount

Cost

As mentioned previously, RRSPs work best with long-term contributions allowing for steady interest earning, called compounding. Therefore, the government will charge you a withholding tax by withdrawing money from the account earlier. Usually, the amount you’ll need to pay will depend on the amount you withdrew and the province where you live. Thus:

• The withholding tax rate is 10% when withdrawing up to $5,000
• The withholding tax rate is 20% when withdrawing between $5,001 and $15,000
• The withholding tax rate is 30% when withdrawing more than $15,000

However, if you live in Quebec, these rates don’t apply. There, federal rates are lower, but you’ll also pay provincial tax.

Furthermore, if your marginal tax rate is higher than the withholding tax, you’ll need to pay more on your withdrawal, depending on the amount. Finally, you’ll also have to pay the cost of permanently losing your RRSP contribution room, as you can’t replace the amount you previously put in, which reduces the potential value of your RRSP.

All in all, we recommend checking with an advisor or robo-advisor before making withdrawals to determine how they will affect you. 

Conclusion

That’s it for our detailed guide on spousal RRSPs. 

With the many benefits this plan offers, couples can ensure that neither will be left stranded after retiring. Since this is an excellent way to save on taxes and ease your burden when raising children or buying a home, couples can plan for their golden years and give themselves a head start.