When to use a spousal RRSP

A spousal RRSP may be an idea to consider in your retirement and tax planning if you and your spouse or common-law partner have widely divergent incomes.

If one spouse has a low income and little chance to save in an RRSP, a spousal plan makes sense

Spousal RRSPs can help couples smooth out their tax bill upon reaching retirement. (Shutterstock)

If you and your spouse or common-law partner have widely divergent incomes, then a spousal RRSP may be an idea to consider in your retirement and tax planning, according to experts.

"A spousal RRSP is great if you have one person in the relationship who is a high-income earner and the other is a low-income earner, whether they are a stay-at-home spouse or they don't have the same career," said Tracey Marshall, a Milton, Ont.,-based certified financial planner with Security Financial Services & Investment Corp.

The contributor gets the tax break, while the money grows in the spouse's name.

Keep in mind that the total amount a contributor can put into their own RRSP and a spousal RRSP can't exceed their annual contribution room. For example, if your tax assessment indicates you have $5,000 in contribution room, you can divide that how you wish, but don't go over $5,000.

In addition, any contributions you make to a spousal RRSP won't affect your spouse's contribution limit.

Strategy for retirement

Making a spousal RRSP contribution can also help couples smooth out their tax bill when retirement age arrives and they start using those funds.

"When you retire, it is more tax efficient for the spouses to have the same level of income," says Marshall. "So if you need a household income of $100,000, you pay less tax if you both have $50,000 coming in, rather than [$80,000] from one spouse and [$20,000] from the other."

One thing to remember about the rules governing spousal RRSPs: If the money hasn't remained in the plan for at least two calendar years after the year in which it was first deposited then the tax liability goes back to the contributor.

"That avoids someone doing a contribution, getting the tax refund, and then the other person turning around [and] pulling it out because they didn't have the cash but they wanted a tax break," said Marshall.

A spousal RRSP can be accessed under the Home Buyers' Plan and the Lifelong Learning Plan. You can withdraw up to $25,000 for the HBP and up to $20,000 to go to full-time to a qualified school.

Finally, in the event the couple's relationship breaks down, a spousal RRSP will be treated like the rest of the family assets and divided equally. The RRSP can be transferred tax free for the purpose of equalizing assets.


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