What Is a Spousal RRSP?
A Spousal Registered Retirement Savings Plan (Spousal RRSP) is a retirement savings account where one spouse (the contributor) makes contributions to an RRSP in their spouse’s or common-law partner’s name (the annuitant). This strategy is designed to split income during retirement, potentially reducing the overall tax burden for the couple.
Purpose of Spousal RRSPs
- Income Splitting for Retirement: By balancing the retirement incomes of both spouses, couples can minimize the higher marginal tax rates that apply to higher income levels.
- Tax Deferral Benefits: Contributions to a Spousal RRSP are tax-deductible for the contributor, lowering their taxable income in the year of contribution.
Comparison with Individual RRSPs
| Feature | Individual RRSP | Spousal RRSP |
|---|---|---|
| Contribution Deduction | Contributor | Contributor |
| Account Holder | Contributor | Spouse (Annuitant) |
| Taxation at Withdrawal | Contributor | Annuitant |
| Income Splitting Benefit | Limited | Yes |
Both accounts offer tax-deferred growth, but Spousal RRSPs provide additional opportunities for income splitting.
Advantages of Spousal RRSPs
Income Splitting at Retirement
Reducing Combined Tax Liability
By shifting retirement income from the higher-income spouse to the lower-income spouse, couples can reduce their overall tax payable. This is particularly beneficial when one spouse expects to have a significantly higher income during retirement.
Avoiding OAS Clawback
The Old Age Security (OAS) pension may be reduced or “clawed back” if a retiree’s income exceeds a certain threshold. By balancing incomes through Spousal RRSPs, couples can keep each spouse’s income below this threshold, preserving their OAS benefits.
Example Scenario
Assuming a higher-income spouse contributes to a Spousal RRSP over several years:
| Without Spousal RRSP | With Spousal RRSP | |
|---|---|---|
| Higher-Income Spouse | ||
| Retirement Income | $80,000 | $50,000 |
| Marginal Tax Rate | 31% | 25% |
| Tax Payable | $24,800 | $12,500 |
| Lower-Income Spouse | ||
| Retirement Income | $20,000 | $50,000 |
| Marginal Tax Rate | 15% | 25% |
| Tax Payable | $3,000 | $12,500 |
| Combined Tax Payable | $27,800 | $25,000 |
By using a Spousal RRSP, the couple saves $2,800 in taxes annually.
Maximizing Contribution Room
Utilizing Both Spouses’ Contribution Limits
While contributions to a Spousal RRSP use the contributor’s RRSP contribution room, the withdrawals are taxed in the annuitant’s hands. This allows the higher-income spouse to effectively use their contribution room to benefit the lower-income spouse’s retirement savings.
Accelerating Retirement Savings
By optimizing contributions, couples can maximize the compounded growth of their retirement funds, leading to a larger nest egg upon retirement.
Contribution Rules and Limits
Eligibility Criteria
Who Can Contribute
- Contributor: Must have available RRSP contribution room based on their earned income.
- Annuitant: Must be the spouse or common-law partner of the contributor.
Contribution Limits
- Determined by the contributor’s RRSP deduction limit, which is the lesser of:
- 18% of the previous year’s earned income, or
- The annual maximum contribution limit set by the CRA (e.g., $30,780 for 2023),
- Minus any pension adjustments.
Deadline for Contributions
- Contributions must be made within the calendar year or within the first 60 days of the following year to be deductible for the current tax year.
- Contributions cannot be made after December 31 of the year the annuitant turns 71.
Attribution Rules
Understanding the Three-Year Rule
The CRA’s attribution rules are designed to prevent income splitting abuses. If the annuitant withdraws funds from a Spousal RRSP within three calendar years of the contributor’s last contribution, the withdrawal may be attributed back to the contributor for tax purposes.
Attribution Examples
- Example 1:
- Last contribution: 2023
- Withdrawal by annuitant: 2024
- Result: Withdrawal amount is added to the contributor’s taxable income.
- Example 2:
- Last contribution: 2019
- Withdrawal by annuitant: 2023
- Result: Withdrawal is taxed in the annuitant’s hands.
Strategies to Navigate Attribution
- Cease Contributions Early: Stop contributing at least three years before anticipated withdrawals.
- Plan Withdrawals Carefully: Schedule withdrawals after the three-year period to avoid attribution.
Withdrawal Strategies
Timing Withdrawals
Post Three-Year Period
Waiting until after the three-year attribution period ensures that withdrawals are taxed in the annuitant’s (lower-income spouse’s) hands, maximizing the benefit of income splitting.
Early Withdrawals
If withdrawals are made within the attribution period, the amount may be taxed in the contributor’s hands, potentially at a higher tax rate.
Retirement Income Planning
Coordinating RRSP and RRIF Withdrawals
- Convert RRSPs to Registered Retirement Income Funds (RRIFs) by the end of the year the annuitant turns 71.
- Plan withdrawals to balance incomes and minimize overall taxes.
Minimizing Taxes in Retirement
- Combine with Other Strategies: Use alongside pension income splitting and Tax-Free Savings Accounts (TFSAs) for optimal tax efficiency.
- Monitor Tax Brackets: Keep each spouse’s income within lower tax brackets when possible.
Impact on Tax Returns
Claiming Deductions
Contributor’s Tax Deduction
- The contributor claims the RRSP deduction on their tax return, reducing their taxable income.
- Must ensure contributions do not exceed their RRSP deduction limit.
Reporting Requirements
- Contributor: Reports contributions on Schedule 7 of their tax return.
- Annuitant: Reports withdrawals as income on their tax return.
Pension Income Splitting vs. Spousal RRSPs
Differences and Benefits
- Pension Income Splitting: Allows transferring up to 50% of eligible pension income to a spouse for tax purposes.
- Spousal RRSPs: Offer greater flexibility, as income can be split regardless of the age or type of pension income.
Combining Both Strategies
Utilizing both spousal RRSP contributions and pension income splitting can further reduce a couple’s overall tax liability during retirement.
Spousal RRSPs in Divorce or Separation
Asset Division Considerations
Treatment of Spousal RRSPs
- Spousal RRSPs are considered marital assets and may be subject to division upon separation.
- The annuitant legally owns the account, but contributions made during the marriage may be considered joint property.
Protecting Retirement Assets
- Legal Agreements: Prenuptial or separation agreements can specify how RRSPs will be handled.
- Consult Professionals: Seek legal and financial advice to understand rights and obligations.
Tax Implications
Attribution Rules Post-Separation
- Attribution rules cease to apply after a breakdown in the relationship, provided spouses are living separate and apart due to the breakdown.
Withdrawal Strategies After Separation
- The annuitant can withdraw funds without affecting the contributor’s tax situation.
- Consider potential tax consequences when dividing assets.
Common Misconceptions
Ownership of the RRSP
Annuitant vs. Contributor
- Annuitant (Spouse): Owns and controls the Spousal RRSP account.
- Contributor: Does not own or have control over the account but benefits from the tax deduction.
Control Over Investments
- The annuitant makes investment decisions within the Spousal RRSP.
- Open communication is essential to align investment strategies.
Impact on Contribution Room
Does Contributing Affect the Annuitant’s Room?
- No, contributions to a Spousal RRSP use the contributor’s RRSP contribution room, not the annuitant’s.
- The annuitant’s own RRSP contribution room remains available for their contributions.
Tips for Maximizing Benefits
Regular Contributions
Setting Up Automatic Transfers
- Automate contributions to ensure consistent saving and benefit from dollar-cost averaging.
Utilizing Lump-Sum Contributions
- Use bonuses or other windfalls to maximize contributions and tax deductions.
Coordinating with Other Retirement Plans
Considering TFSAs and Pensions
- TFSAs: Offer tax-free growth and withdrawals, complementing RRSP strategies.
- Employer Pensions: Factor in when planning overall retirement income.
Tax-Efficient Investment Choices
- Choose investments that align with risk tolerance and retirement goals.
- Consider asset location strategies to optimize after-tax returns.
Monitoring and Adjusting Plans
Regular Financial Reviews
- Assess retirement plans annually or when significant life changes occur.
- Adjust contributions and investment strategies as needed.
Consulting Financial Advisors
- Professional advice can help optimize retirement strategies and ensure compliance with tax laws.
Frequently Asked Questions
Can Both Spouses Have Spousal RRSPs?
- Yes, each spouse can contribute to a Spousal RRSP for the other, though this is less common.
- It may be beneficial if both spouses expect significant income disparities at different times.
What Happens if the Annuitant Passes Away?
- Designated Beneficiary Is Contributor:
- The RRSP can be rolled over to the contributor’s RRSP or RRIF tax-free.
- No Designated Beneficiary:
- The RRSP value is included in the annuitant’s estate and may be subject to taxes.
Are Withdrawals Mandatory at a Certain Age?
- Conversion Deadline: RRSPs must be converted to a RRIF or annuity by December 31 of the year the annuitant turns 71.
- Minimum Withdrawals: RRIFs require minimum annual withdrawals based on the annuitant’s age.
