A spousal RRSP is a retirement savings plan in which the annuitant, or owner, is the spouse of the person who pays for it. The primary purpose of a spousal RRSP is to shift retirement income from one spouse to the other. When the lower-earning spouse withdraws money from their retirement fund, their lower tax rate can help reduce the couple’s overall tax bill. Additionally, the higher-earning spouse may be able to claim a tax deduction for contributions made to the spousal RRSP, which benefits the family as a whole.
The Benefits of Getting a Spousal RRSP
A spousal RRSP can provide several benefits for couples who are married or living together. This retirement savings plan enables people to split their money after retirement, which reduces their taxes and ensures equal retirement savings for both individuals.
The primary goal of a spousal RRSP is to facilitate the transfer of retirement income from one spouse to the other. This helps the lower-earning spouse to manage their taxes better as a couple since they can withdraw money from their retirement fund at a lower tax rate. Additionally, it may be possible for the higher-earning spouse to claim a tax deduction for contributing to the family’s retirement fund.
A spousal RRSP is particularly useful in scenarios where one spouse earns significantly more than the other, has a pension from work, or takes time off work to raise a family or pursue further education. This plan ensures that both partners have equal retirement savings, regardless of their income levels or career choices.
Ownership of the spousal RRSP plan
Typically, the spousal RRSP is registered under the name of the lower-earning spouse who owns the plan and makes all investment decisions. This individual is also the only one who can withdraw the funds. The higher-earning spouse can only contribute to the plan, which can help reduce the couple’s overall tax bill.
Despite earning less, the spouse who owns the plan is subject to the same tax laws as their higher-earning spouse, as long as they continue to contribute to the plan.
It’s up to the annuitant, or the person who receives the annuity, to choose the name of the plan. However, there are other options for registering the plan, such as in cases where the annuitant is over 71 years old or if their spouse is younger than them.
The Advantages of Having a Spousal RRSP
If you and your partner earn different amounts of money, a spousal RRSP can be an effective way to save on taxes. Here’s an example to illustrate how it works: suppose one person earns $100,000 per year while the other earns $50,000. The individual RRSP limit is 18% of the previous year’s income, up to a specified maximum amount. Both individuals are subject to the same limit. For the current limit, check this website.
Without a spousal RRSP, the higher earner could contribute $18,000 to their RRSP and the lower earner could also contribute $9,000. However, with a spousal RRSP, the higher earner could contribute $14,000 to their own plan and $4,000 to their partner’s plan. They could still deduct the full $18,000 from their income taxes, and the lower earner could still deduct $9,000.
The benefits of having a spousal RRSP extend beyond retirement. For instance, if one partner decides to stay home with their children or return to school, the other partner can make contributions to their spousal RRSP in advance. This allows the stay-at-home partner to withdraw funds from the plan during their time out of work and pay minimal tax, while the contributing partner can save money on taxes in the present.
If you’re over 71 years old and your partner is not, you can use spousal RRSPs to save on taxes. You can also use them to reduce your tax liability upon death. As long as your partner is not over 71, you can make contributions to their plan and claim a tax deduction for the amount. Similarly, your estate can make contributions to the plan upon your death to reduce your inheritance tax liability.
Also read: Essential Information on Payment Dates and Benefits
Some Rules About Spouses’ RRSPs You Have to Know
Spousal RRSPs are subject to various government rules to prevent tax evasion, which can make it challenging to understand how to utilize the accounts. It’s not possible to max out both your and your spouse’s RRSP contribution, even if you have two accounts.
It’s also important to note the management fees charged by RRSPs, which can eat into your savings. While many large banks charge significant fees for managing spousal RRSPs, this isn’t always the case.
RRSP contributions made by someone other than the account holder must remain in the account for at least three years, known as the “three-year rule.” If the money is withdrawn earlier, it’s considered taxable income for the contributing spouse.
Whether you have one or two RRSP accounts, you can contribute the same amount to each. Both individuals can contribute up to $20,000, split between their individual and spousal RRSPs in any way they choose, up to the maximum limit.
Spousal RRSP contributions can be made until the end of the year in which your spouse turns 71.
RRSPs can be converted into retirement income products such as registered retirement income funds (RRIFs) or annuities after you turn 71. These products are known as “retirement income products,” and the lower-earning spouse will be taxed at their current tax rate on the income received.
In summary, if you and your partner are in a marriage or cohabitation, both of you can save for retirement by utilizing a spousal RRSP. The plan is designed to ensure that both parties have an equal amount of retirement savings, thereby guaranteeing equal payouts during retirement. By opening a spousal RRSP, you can balance your partner’s savings. The contribution limit is 18 percent of your income from taxes last year, which translates to $18,000 for someone who earned $100,000. Each year, one spouse can withdraw 4% of their money, equating to $40,000 annually. However, the government has strict regulations in place to prevent people from using spousal RRSPs to evade taxes. For instance, there is a limit of $20,000 that can be put into an RRSP, but this can be divided between the two parties. Note that while you can contribute to your RRSP and your partner’s, you can’t max out both accounts.
