How Spousal RRSPs work for Canadians

Today is Valentine’s Day and I could not think of a more appropriete day to discuss Spousal RRSPs.

Spousal RRSPs are one way to income split for couples in Canada.

The benefits are to defer taxes right away, and reduce taxes in retirement.

This is something we are doing this year since my wife will be taking some time off from our business (we are expecting April 1). It is important that our withdrawals are close to the same once we are retired to save on taxes (never a good idea to pay more tax then you need to).

If one spouse has a significantly higher income now, or expects to have a significantly higher retirement income, you should consider taking advantage of a Spousal RSP right away.

Definition of income-splitting

Income-splitting is a way to reduce a family’s taxes by moving some of the income from a higher-income earner to the lower income earner so that taxes are reduced for the higher-income earner.

What is a spouse?

Canada Revenue Agency (CRA) defines a spouse to include common-law spouses. If you have lived in a conjugal relationship for one year or more, or live together and have a child, you can make a spousal RSP contribution.

Important notes regarding Spousal RRSPs

Your spousal RRSP contribution, when combined with your personal RSP contribution, may not exceed your personal RSP deduction limit.  The money within the spousal RRSP now belongs to the lower income spouse. Additionally, the lower-earner spouse cannot withdraw from the plan until 2 calendar years (Jan 1-Dec 31) after the last contribution. Otherwise, the withdrawal will be taxed in the hands of the contributor.

Spousal RRSP example

Let’s take Mr. X who makes $100,000 per year. In 2012 the maximum contribution limit is $22,970.

Mr. X has several options:

  • Mr. X can take the whole amount and contribute it to either his personal self-directed RRSP.
  • Mr. X can contribute a portion to his RRSP and a portion to Mrs. X’s RRSP as long as the total doesn’t exceed $22,970

An unknown benefit to a spousal RRSP is the ability to contribute to a younger spouse. If one spouse is still working, they can contribute to the lower-earning spouse and still get the valuable tax deduction.

A spousal RRSP offers Canadians an opportunity to work within the graduated income tax system in order to minimize a household’s overall tax burden in retirement. By equalizing each spouse’s retirement income, the overall tax bill is reduced by keeping both spouses in a lower tax bracket.

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