Rhonda's Financial Blog

Spousal RRSPs: an Investment Tool for a Comfortable Retirement

Tuesday, February 21st, 2012

A spousal RRSP is a savings vehicle where one spouse makes a contribution to a plan opened in the other spouse’s name. It allows couples to split income in retirement so that each person has a similar amount of income. This strategy helps to lower the income tax the couple pays in later years.

When Spousal RRSPs Makes Sense

A spousal RRSP makes sense in situations where one person earns significantly more than the other. It can be considered in a situation where one spouse is earning and the other one is at home caring for children. Spousal RRSPs can also be used in situations where both spouses are working but there is a significant difference in their respective incomes.

In a situation where both spouses approximately the same amount, a spousal plan is not the best option. Instead, each spouse should be making contributions to a personal plan in accordance with his or her RRSP limit. The amount that each person can contribute to a RRSP is listed on the Notice of Assessment issued by the Canada Revenue Agency (CRA) each year.

Opening a Spousal RRSP Account

When a couple decides to open a spousal RRSP, the account is opened in the lower-earning spouse’s name. The spouse with the higher income would make contributions to the plan, up to his or allowable RRSP limit each year. The contributing spouse would also receive the tax deduction for the amount deposited into the plan.

If the lower-income spouse has an existing RRSP account, it can be used for this purpose. However, once the higher-income spouse makes a contribution to the lower earner’s plan, the entire amount held in the investment account is considered to be a spousal RRSP.

The spouse whose name appears on the plan is its legal owner. He or she will be responsible for the taxes payable on funds withdrawn from the plan, subject to the attribution rules.

Income Tax Act Attribution Rules

The Income Tax Act includes attribution rules to ensure that taxes payable on assets transferred from one person to another are collected appropriately. In the case of a spousal RRSP, the rules require that withdrawals made from a plan in the same year the contribution was made or the previous two calendar years is treated as income for the contributing spouse.

The funds deposited into a spousal RRSP should be treated as a long-term (minimum of three years) investment. If any or all the funds are withdrawn before that time, the higher-earning spouse will lose the tax advantage of contributing to the plan.

There may be situations where having more than one RRSP account makes sense. If an investor wants to have the flexibility to withdraw funds from an RRSP before retirement if necessary, a second plan would offer the choice of taking the money from the one which would be taxed at the lower rate.

Contributing to a spousal RRSP can be an effective way to split retirement income and pay less in taxes. To find out whether this is makes good financial sense for your personal situation, consult a financial advisor.