I often get questions from couples wanting advice as to whether they should consider a spousal RRSP to help cut their overall tax bill in retirement. Just like a lot of things, it depends.
Spousal RRSP plans are the most beneficial in situations where one spouse earns significantly more than the other one. For example, if one spouse was working as an executive and their lower-earning spouse worked as a contract worker or a stay-at-home parent, the higher earner should contribute to the other’s spousal RRSP.
Another obvious benefit for spousal contributions is the situation where one spouse is no longer able to contribute to their RRSP because they turned 71 and had to convert their RRSP to a RRIF. They can still contribute to their spouse’s account until the end of the year that their spouse turns 71. The concept behind couples considering a spousal RRSP is that they are able to divide their retirement savings more equally, ideally in lower overall tax brackets when they both start to withdraw their RRIF money.
For couples who earn similar incomes, and end up with similar retirement savings, there may be limited benefits of contributing to a spousal RRSP. Additionally, couples need to remember that the spouse contributing to the spousal RRSP can only do so up to the amount of the contribution room that they have available. Simply put, if your contribution limit this year is $12,000, you’ll still only able to contribute $12,000 into any type of RRSP, whether it’s in your name or your spouse’s.
The point of spousal contributions is to end up with each spouse in a lower overall tax bracket, balancing retirement and future savings. It doesn’t change anything about contribution room. One benefit for couples who plan on retiring before age 65, if they both have RRSP plans, it allows them to divide the RRSP withdrawals between them. Compare this to having one spouse holding all the RRSP funds, as the couple may have to pay more tax on withdrawals made before age 65, because they could not take advantage of the pension income splitting rules that kick in at age 65. Jim Yih from Retire Happy has a good article explaining Spousal RRSPs in more detail. The proper use of Spousal RRSPs.
The one major limitation to contributing to a spousal RRSP is that the spouse cannot withdraw any money from the plan for three calendar years after the last contribution, or that withdrawal will be attributed to and taxed in the hands of the contributing spouse. Gail Vax-Oxlade goes into more detail on this subject in her article 2 Spousal RRSP Rules to Know. This rule was put in place to discourage higher income earners from temporarily sheltering funds in their lower-income-earning spouse’s name.
Couples should also keep in mind that money put into a spousal RRSP belongs to the person whose name is on the account, not the contributing spouse. This can lead to complications if a divorce or separation occurs.
To ensure that you don’t run afoul of the taxman, please consult with a trusted financial advisor before jumping into a plan that might backfire.