RRSP season is upon us and we are preparing our taxes for the previous tax year. One of the most frequently asked questions we get in our office is, “Should we contribute to a Spousal RRSP (SRRSP)?” There are situations when a SRRSP would be beneficial and warrant consideration and times when it would be of little or no benefit. Couples with significantly different incomes should consider using a SRRSP in order to reduce the contributing spouse’s immediate taxable income and also reduce their future taxes in retirement.
For example if one spouse is an executive, a highly paid self-employed professional or has a Defined Benefit Pension Plan through an employer and the lower income spouse has no pension plan or is a stay-at-home “domestic engineer”, a SRRSP would provide a valuable tax-deferred shelter for future income. It should not be used for the mere fact that you are married.
By owning a spousal RRSP couples are able to divide their retirement savings equally and hopefully put themselves in a lower tax bracket when they begin to withdraw the money from their RRSP during retirement.
However, if a couple already have similar incomes, retirement savings, and pensions, the benefits of contributing to a SRRSP become limited or totally non-applicable. One fact to keep in mind is that an individual’s contribution room does not increase if they put money into a spousal RRSP. If a person’s contribution room limit is $8,000, they will still only be permitted to invest a total of $8,000 into any type of RRSP whether it is personal or spousal RRSP.
The objective is to keep each spouse in a lower tax bracket. It has nothing to do with overall contribution room. Couples that plan on retiring early (before age 65) can benefit from having a spousal RRSP by having the ability to divide the RRSP withdrawals between them. If all the RRSPs are under one spouse, the couple could be required to pay more tax if the withdrawals are made before age 65 which is before they can take advantage of pension income splitting rules.
There is one important caveat that the receiving spouse must consider the three year attribution rule. The spouse receiving the contribution from a higher income spouse cannot withdraw from the spousal RRSP for three years after receiving the last contribution or the withdrawal will be taxed against the contributing spouse’s income. This rule discourages a higher income spouse from temporarily sheltering funds under the lower-income-earning spouse’s name and immediately withdrawing the money at a lower tax bracket.
What also should be kept in mind is that money contributed to a spousal RRSP belongs to the person to whom the funds are registered – which could lead to issues if a divorce or separation occurs.
Have a question about Spousal RRSP’s? Ask us in the comment section below or give us a call to schedule an appointment 519-250-5444.