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What are the rules of setting up a spousal RRSP?

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You may know about a registered retirement savings plan (RRSP) and how it can help you save money for  retirement. But a spousal RRSP has other benefits you can take advantage of. 

A spousal RRSP allows you to “split” your retirement income and pay less tax as a couple over  your lifetimes. Let’s go through what a spousal RRSP can do. 

Why get a spousal RRSP? 

A spousal RRSP is a retirement savings tool that a married or common-law couple can use to save for retirement and lower their taxes. It lets couples split their income after they retire, which reduces the tax load. The goal of the plan is to even out retirement savings between two partners. This way, when you retire, you’ll both withdraw a similar amount of money from your RRSPs. 

There are many ways a spousal RRSP can benefit you and your family. Maybe one spouse earns a big income and has an employer-sponsored pension, while the other spouse stays at home. Or maybe one spouse takes time off from their  career   to raise a family. Possibly one partner wants to return to school or can’t work due to an illness. Or maybe both you and your partner work but earn very different salaries. 

How does it work? 

Usually, a spousal RRSP is used like this: the spouse with higher income opens and contributes to a spousal RRSP for his/her partner. 

Imagine  one spouse earned much more in their career and put in a lot more to his/her RRSP. When that spouse retires, the nest egg will be bigger than the partner’s. If both take out the same percentage from their savings, the spouse 
with more saved may pay taxes at a higher rate in retirement. This could mean a higher overall tax bill during  retirement . 

Here is an  example of a married couple: the wife works her whole life and earns a great salary. The husband is a stay-at-home dad. When the couple retires, they get $100,000 each year from the wife’s large savings, and that money is taxed in a high-income bracket. 

With a spousal RRSP, the wife makes annual contributions to her husband’s account. So when they retire, they each get $50,000 in retirement income. It’s the same total , but because each spouse is in a lower tax bracket they pay less total tax than in the first case. 

Who owns the plan? 

The spousal RRSP is registered under the name of the spouse making the lower income and the plan is theirs. This person makes the investment decisions and is the only one allowed to withdraw money. The only, but important role of the spouse earning a higher income is to contribute  money. 

While they’re working, the spouse contributing for the lower earning partner deducts the spousal contribution from their taxable income just as they would for contributions to his/her own account. 

What are some spousal RRSP rules you should know? 

There’s a 3-year attribution rule, which means contributions to a spousal RRSP can’t be taken out for at least three years after the date they were put in. If the funds are taken out within 3 years, the money becomes taxable income for the contributing spouse. 

Your RRSP contribution limit is the same whether you have two accounts or  one. For example, if your contribution limit is $20,000, you can divide that amount between your RRSP and the spousal RRSP. You can put $15,000 in one and $5,000 in the other. Just don’t go over the total limit. 

Like a regular RRSP, you can keep adding to a spousal plan until the end of the year your spouse turns 71. 

RRSPs can convert into retirement income products, such as registered retirement income funds (RRIFs) or annuities, at the end of the year you turn 71. At this point, the retirement income is taxed in the lower-earning spouse’s name at his/her current tax bracket. 

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