The Canadian government offers plenty of incentives for long-term savers, including couples saving for retirement. Sure, both of you can still open your own individual Registered Retirement Savings Plans (RRSP). But if you are looking for a way to manage your tax bill as a couple, as well as build a bigger nest egg for your partner, spousal RRSPs can make a lot of sense. Here's what you need to know about using this tool.
What is a spousal RRSP?
A spousal RRSP is a qualified retirement savings plan that you set up for your partner. You are able to make contributions to the RRSP, however, your spouse is the actual owner. The point of the spousal RRSP is to help you even out any gap in income between the two of you during retirement, while allowing you a tax break right now.
So you can contribute to the RRSP and receive the tax deduction today. During retirement, your partner withdraws the money and pays the income tax that results from the withdrawal.
Who would benefit from a spousal RRSP? Who wouldn’t?
You’ll likely get the best results from a spousal RRSP if there is a large disparity in income between you and your partner. For example, a spousal RRSP can make sense if you work full-time, and your partner doesn’t or just works part-time. If you and your spouse have similar incomes, the spousal RRSP might not be as effective.
Consider this scenario:
You make $125,000 a year, and while your partner is the primary caregiver for the kids, he or she also works part-time and earns $35,000 a year. You each can contribute up to 18% of your income to an RRSP. For you, that means $22,500, but for your spouse, that means they can only contribute $6,300.
In an individual RRSP, this accumulates to a much smaller nest egg for your spouse overtime. It also leads to more taxes on your account down the road. As you begin to withdraw later, you will likely have to pay hefty taxes on those withdrawals, since you’ve invested so much.
On the other hand, what if you divert some of that money into a spousal RRSP? It doesn't change your contribution room – you can still only contribute a max of 18%. However, it re-allocates some of that to your spouse. It equalizes your income in retirement, your partner gets a bigger nest egg, and you’ll be saving on tax when making withdrawals, since your spouse will be the one claiming that income from the spousal RRSP, putting you in a lower tax bracket.
Things to know about the spousal RRSP
Before you decide to spread the love and wealth with a spousal RRSP, you should note a few things first:
- Remember that your spouse owns the RRSP. While you are making contributions, they become his or hers once in the account. Your partner makes the investment decisions related to the account, and decides when to withdraw.
- You can open a spousal RRSP for your common law partner, the same way you would for your husband or wife.
- Spousal RRSPs have a three-year attribution rule. If your spouse withdraws money from the RRSP within three calendar years of the last contribution, you will be taxed for it. It's important that you and your spouse are on the same page and discuss the repercussions before any withdrawals are made.
- If your spouse is younger than you, the spousal RRSP can be a great tool since you can make contributions until the end of the year in which he or she turns 71. So, even if you are over 71, you can still contribute to a spousal RRSP.
Carefully consider your options before moving forward with a spousal RRSP. It could possibly save you a lot, but as with all things investing and personal finance, the best tools for you depend on your individual situation. Of course, one great option is to consult with a retirement specialist and put together a plan that allows you to maximize your joint income in retirement while minimizing your taxes.
This post has been updated.