Spousal RRSP – What you need to know
The Spousal RRSP is a retirement savings vehicle available to Canadians that helps to smooth out income tax within couples that earn at different rates. The key benefits of an RRSP is the deferral of tax payments until the RRSP holder is at a lower tax rate. For couples looking to maximize savings and optimize tax loads, spousal RRSPs are a great option to blend income.
Regular RRSPs work well for individuals, but how does it work in practice when spouses earn different amounts? When one partner in the couple is earning much more than the other, the Spousal RRSP is a fantastic option for couples to equalize family assets and save for retirement.
Splitting family income is extremely beneficial for long-term saving. Why not maximize your wealth with every opportunity you have? There are all kinds of ways for families to split their income, from basic expense prioritization to cash gifts to adult children. The Spousal RRSP is another, more complex alternative – let’s explore what a Spousal RRSP can do for your savings.
What is a Spousal RRSP?
We have covered RRSPs in past articles. A spousal RRSP is no different from a regular RRSP but with some slight differences in how you contribute. It operates the same way that a regular RRSP does, in that you put money in tax-free and leave it until you retire. When you retire, your withdrawals are taxed at a lower rate than when you were earning at your peak. The benefit of the RRSP is that you are shielded from high tax rates and when you retire and begin to draw down your RRSP, you pay fewer taxes.
Spousal RRSPs are simple. Consider the following scenario. You earn $100,000 a year and your spouse earns $45,000 a year. If you are both maxing out your RRSP contributions one of you will have significantly more saved for retirement. This disparity in income can have dramatic effects on overall retirement savings after your investment period.
This is where the spousal RRSP comes into play. The spousal RRSP allows you to blend your income and ensure that you are maximizing your RRSP contributions within your family. By leveraging a spousal RRSP you not only maximize your retirement savings; you also reduce the taxable income of the higher earning spouse.
Spousal RRSP Facts
- Recent changes to the definition of the spousal RRSP now allow for common law partners to be included.
- The max age for spousal RRSP contributions is 71. If you are older than 71 but your partner is not, you may still contribute to your spouse’s RRSP. Once you are both past 71, you can no longer contribute. Start contributing to each other’s RRSP’s early!
- The contribution limit of the spousal RRSP is based on the higher earning spouse’s income. In the $100,000 and $45,000 couple, the $100,000 spouse sets the contribution limit.
- Be wary of taxation on spousal contributions. The rules of attribution surrounding spousal RRSPs dictates that any withdrawals on the RRSP within two years of a spousal contribution will be taxed at the rate of the contributing spouse. If you end up withdrawing from your RRSP early, the withdrawals will be taxed at the rate of the contributing spouse. This can damage your long-term savings strategies, but that is a given with any RRSP withdrawal.
- Be strategic about your spousal RRSP contributions. It is usually best to make your annual contributions in December, or later in the year. This allows you to have more flexibility with your withdrawals in case you need to draw down your RRSP early. By submitting in December, you can withdraw as early as January, two years down the road. If you end up submitting in January, you’ll have to wait for the full period.
- Spousal RRSP’s are most effective when spouses are in different tax brackets. That’s not to say that you shouldn’t contribute if you’re in the same bracket, but it is something that you should be aware of. Regardless of your tax status, you should be sure to focus on maxing out your RRSP.
Saving for retirement as a couple
The spousal RRSP is only one option for saving as a couple. There are many other strategies that you can use to maximize your families wealth. A simple strategy like having the higher earning spouse cover household expenses is an easy practice to implement and will have a big impact on your ability to save as a family over the year.
The earlier that you start thinking about saving for retirement the more you will have when that day finally comes. The spousal RRSP is a great option to consider, especially for families with kids when one spouse works part time or runs a small business on the side.
Keep your options open and be aware of what is available!
Thanks for reading!
If anything on this blog interests you further, please do not hesitate to reach out to me via email at [email protected] I’d love to talk about my financial services and advice in Vancouver, British Columbia’s lower mainland, and Canada in general.
- Brad Blair, CFP, CIM, FCSI, CHS.