Good morning! I received some reader mail and I’ve been asked to write about spousal RRSP’s. Here it goes..

What is a Spousal RRSP?

  • A spousal RRSP is where one spouse makes an RRSP contribution but the other spouse (typically lower income spouse) owns the plan.

Why would a married couple contribute to a spousal RRSP?

  • Not all married couples should use a spousal RRSP. This only makes senses if one spouse makes significantly more income than the other.
  • It provides a means of income splitting. Here in Canada, legit ways to income split are not easy to come by.
  • The reason for incoming splitting is so that during retirement, both spouses will have approximately the same income thus reducing income tax.

How does it work?

  • In a spousal RRSP, the higher income spouse will contribute to the plan. The higher income spouse can then claim the tax deduction.
  • For all intents and purposes, the money within the spousal RRSP now belongs to the lower income spouse.
  • The main caveat being that the lower income spouse cannot withdraw from the plan for 2 calendar years (Jan 1-Dec 31) after the last contribution (up to 3 calendar years depending on when you open the account). Otherwise, the withdrawal will be taxed in the hands of the contributor.
  • For example, if I contributed $10,000 into a spousal RRSP in May 1, 2011, then my wife can withdraw the $10,000 on Jan 1, 2014 and be taxed in her hands.  To reduce the overall wait time, I could contribute to the spousal RRSP on Dec 31, 2011, and withdraw on Jan 1, 2014 bringing the total wait time of 2 years.

Where can I open an account?

Most discount brokerages will have an option for a spousal RRSP.  Here is our discount brokerage comparison.  Note that our readers have voted Questrade as their favorite brokerage which is where we have opened our most recent RRSP trading account.  You can read our full Questrade Review here.

Personally, we don’t use spousal RRSPs because my wife and I both have approximately the same salary. However, if we decide that it would make sense for my wife to become a stay at home Mom, then you can be assured that we will use this strategy.

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In regards to your statement: “This only makes senses if one spouse makes significantly more income than the other”.

It is important to note that this should not be interpreted as: “You should have a spousal RRSP if one spouse makes significantly more income than the other.”

There are cases where even in this circumstance it does not make sense to have a spousal RRSP. The key point to keep in mind is that you are using up your allowable contribution room in your RRSP when you contribute to your spouses. (If I am wrong on this let me know, but I have been told this by 2 sources.)

If you have a case where your spouse makes less money than you but neither of you has a pension, a spousal RRSP makes no difference.

Similarly if you make more than your spouse but he/she has a pension. A spousal RRSP will actually be worse.

If you make more money than your spouse, you have a pension, but your spouse doesn’t. It definitely makes sense to contribute to a spousal RRSP.

But I think the government was going to allow income splitting for retirees. In which case it makes the whole point of spousal RRSPs moot, unless you and your spouse plan on retiring early.

Current income may not be as big of a factor as anticipated retirement income. Maybe one spouse is anticipating a company pension than the other. Spousal RRSP contributions can make sense in this situation if incomes are equal.

Steve – you are right – contributions to a spousal account use up the contribution room of the person making the contribution.

With income splitting it’s pretty debatable if these accounts are worthwhile anymore. Even if you are planning early retirement and one account is bigger than the other – if there is enough $$ in the smaller account to support equal withdrawals until age 65 than you don’t need the spousal.

Having said that, if you already have one (as I do) then it does no harm to continue contributing to it.

Stay at home strategy:

(1) high-income spouse pours money into spousal RRSP
(2) wait 2 years
(3) low-income spouse takes the money out as income uses it to pay household expenses

Mark – don’t forget you would give up the spousal/dependant credit if you create income for the stay-at-home spouse. In our case it’s about $1800 for last year.

Maybe I missed something, but didn’t the recent budget changes make it so that retirees can split income anyway? Doesn’t that make this strategy much less valid now?

Mark: Can you explain why step (3) of Stay at home strategy is for the lower income spouse to pay for household expenses?

Normally, you would want the lower income spouse to invest the money and have the higher income spouse to pay for the expenses. The thought is that the investment income would be then taxed at a much lower rate. (assumes that you’re not employing the Smith Maneuver)

It was stated that the spouse can’t withdrawl for 2 years. Is the HBP exampt from that provision? Would a 90 day withdrawl be possible?

Magnum – the spouse can withdraw within 2 years but then it’s taxable in the hands of the contributor – not her.
HBP funds have to be in the rrsp for at least 90 days.

Another consideration that I didn’t see mentioned for contributing to a spousal RRSP is to balance out the RRSP holdings of each spouse. In our case, I had started working and contributing to my RRSP before my wife did (I’m 4 years older and a little more financial savvy) and have ~5x the RRSP holdings that she has. So our spousal plan is to balance out our repsective RRSP holdings faster. I also earn a higher income right now and she will be going on mat leave in a few months, so this way I can continue to contribute to her RRSP while she is not working and earning little income.

I wasn’t thinking of retirees – I was thinking of my own situation: I work, though not making much, and my wife is a stay-at-home mom with no income.

Mike: is there an income threshold for the spousal/dependant credit?

Qubikal: Yes – that would be better, assuming you can pump enough money though the RRSP

I don’t know if there is a threshold for the spousal credit.
I make around 100k and I got about $1800 last year from it.

FrugalTrader –

Just to clarify how the current income splitting for retirees:

Eligible pension income

For individuals aged 65 years and over, the major types of qualifying income that can be allocated to a spouse or common law partner are:
* a pension from a registered pension plan (RPP) ;
* income from a registered retirement savings plan (RRSP) annuity; and
* payments out of or under a registered retirement income fund.
For individuals under 65 years of age, the major type of qualifying income that can be allocated to a spouse or common law partner is income from a pension from a registered pension plan.

Even with unlimited retirement income splitting, a case where a spousal RRSP can still be worthwhile is when there is an age gap.

An older spouse who can no longer contribute to their own plan can still contibute to a spousal plan if they have contribution room. The more tilted the nest egg is towards the older spouse, the bigger the saving will be. The older spouse will reduce their tax bill, legally transfer assets to spouse, and defer tax (even better if the younger spouse will have a lower tax rate).

Retirement splitting or not, spousal RRSP contributions should be done today where possible. My marginal tax rate is about 46%, my wife’s is about 32%. Even if the government does offer splitting in the future of RRSP’s during retirement, this is a no-brainer today where possible.

the main advantage of RRSP is tax deffered growth..more years your funds stay in RRSP,greater the benefit..but once you complete 69 years(i think it’s being changed to 71)..you have no choice but to make withdrawals..
so if your spouse is younger than..she is going to turn 69 a few years after you..so the funds can remain in RRSP for those extra years…..one more advantage of spousal RRSP

FT – The key with spousal RRSP’s is to try to income split after you retire. The goal is to have similar taxable incomes after you retire. Consider any pensions, how much CPP each would likely get, investment and any other income either of you may have, and how much you each have in RRSP’s and try to even your incomes.

If your incomes are similar, neither of you has a pension and you are paying similar amounts into CPP, then generally you should try to keep your total RRSP’s about equal. If one spouse has noticeably less in RRSP, then you can get them closer with a spousal RRSP.

This is a separate decision from which one should make an RRSP contribution, which is based on your incomes and tax brackets today.

The retiree income splitting rules are new and may change in the future and don’t apply to all types of income. There is no disadvantage of using a spousal RRSP, so it is still generally smart to plan the same for equal retirement incomes.

Mark – Your strategy sounds good, but Mike is right that the spousal tax credit generally wipes out the advantage. It is a credit based on the lowest tax rate up to $7,500 of income (2006), which is almost the entire personal tax credit. Essentially, you or your spouse will pay 22% tax on any income she makes – including a withdrawal from a spousal RRSP if she has no other income.

Ed

Ed: I keep hearing conflicting info on what type of income is eligible for splitting. I believe that payments from a RRIF are eligible for splitting but what about from an RRSP? I’ve heard yes and no in various media.

It’s not an overly important question since it’s no big deal converting part of an rrsp to a rrif but I’d like to know the facts!

[…] How Spousal RRSPs Work […]

[…] How Spousal RRSPs Work […]

[…] Spousal RRSP's – the goal is for your and your wife to retire with the same size nest […]

Hi FT, Thanks for posting this informative article I think it’ll be very helpful for my current and future situation.

That said, I have one question: When opening up a spousal RRSP account, would I open the account under my spouse’s name (assuming that I would be the one contributing to her account) or would it formally be under my name and would I have trading authority over her account?

The “three-year rule” applies to spousal RRSPs regardless of when, or to which financial institution, contributions were paid.
However, this rule does not apply to withdrawals under the Home Buyers’ Plan (HBP) or the Lifelong Learning Plan (LLP).
source: http://www.dsf-dfs.com/en-CA/Prtclrs/CnsltCntrFrmtn/CntrRrRtrt/REER/RglsRR.htm#WithdrawalfromtheSpousalRRSP

[…] around.  On top of that, with a large discrepancy between your incomes, you should consider Spousal RRSP's which will allow you to income split when you both retire.  When you do get to contributing to […]

I’m still not clear here. RRIFs qualify under the pension splitting in retirement. Am I to assume that spousal rrsps are now a little unneccesary? It’s just semantics and paperwork.

You are correct nobleea, RRIF income can be split which diminishes the spousal RRSP contributions worth. However there may be other reasons to continue keeping the RRSPs value even between spouses, one of them being that we don’t know what the rules will be when we retire.

I asked a similar question over on Preet’s site wheredoesallmymoneygo.com . . . link below:

http://www.wheredoesallmymoneygo.com/ask-a-question/post/331424

under what circumstances should one do a spousal RRSP? I went to scotia on friday and they told me that i shouldn’t do this until i’m 40 or 50. I’m 30.

my wife makes about 40K less than me is that enough to take advantage of spousal RRSPs? What do you think

Hi all,

Spousal RRSPs can still be useful, since not nearly all income in retirement can be split.

The purpose of spousal RRSPs is to try to keep the taxable income or 2 spouses similar in retirement. Your higher income is only one factor, Peter. You should look at all factors and project what your retirment incomes are likely to be.

Consider your total RRSP’s vs your wife’s, how much pension income you may get from your jobs or the government, and any other income or investments either of you may have now or before you retire.

The Scotia person’s answer is simplistic and shows they don’t understand at all. Age is not really relevant, except that it is sometimes easier to project your retirement incomes when retirement gets closer.

Regular RRIF income and pensions can be split, but not most other income, including investment income, lump sum withdrawals from RRIFs or RRSPs, employment income or other retirement benefits. So, having some of your retirement income split does not necessarily mean your taxable incomes are effectively split.

As FT mentioned, the split only applies at age 65 and not to anyone that may retire early.

Because of these factors and because the rules may change again, we still consider it adviseable to use spousal RRSPs to plan to equalize our clients’ retirement taxable incomes.

If you both don’t have a pension or any other specific income you expect in retirement, and if you expect similar amounts for OAS & CPP, then it is relatively simple and you should try to keep the total RRSPs in each of your names at similar levels.

Ed

simply put :

income:
1-husaband 155,000 $
2-wife : no income

Sousal RRSP:
opened dec/2007 for 20,000 $

if, withdrawed on jan/2010

then how much can she withdraw (net) ?

thank you

thank you FT for your rersponse,
so, if my wife withdraw 5000$$ jan/2 and another 4000 the very next day minus the refundable 10% withholding tax,
would this affect my spousal tax credit when i file for my tax then?
p.s if yes,based on the total income , how much would i lose ?

If you do the income split with low-income spouse, it seems to me to make sense to do the following:

ALL RRSP Contributions go to Spousal until it’s approx $35k (or double that, your choice).
…Wait 2 years
Pull $35k from Spouse (as income) year 1
Pull $35k from Spouse (as income) year 2

Rinse and repeat. Lather if necessary.

WHY $35k? This maxes the lowest marginal tax bracket for the high-income person, making their “effective taxes” 16% for that initial $70k, then a big jump of course for the subsequent dollars.

This is a heck of a lot better than a measly $1600 dependent claim.

Canada: The land of “Individual Taxation” when beneficial to Revenue Canada, and the land of “Family Taxation” for benefits to the family (GST Rebate etc). Expletives deleted.

what happens to the funds that are in a spousal rrsp on marriage breakdown

Rose: They’re still considered a matrimonial asset and as such would be included in the assets to be divided at the time of a marriage breakdown.

Can someone explain what happens to contribution room in a spousal RRSP. I understand the contributing spouse needs to have the room to contribute to his/her spouses RRSP but does this only affect the contribution room of the contributing spouse or do both get affected.

Thanks

Rej,

Contributing to your spouse’s RRSP only affects your contribution room.

please help me, do they track which contribution my spouse take out from the spousal rrsp. example: I put 5k 3 years ago on the spousal rrsp which is locked in a 5 year GIC at ING. this year I will put 2k into the spousal rrsp and will only put it in a high interest rrsp ING savings account. So now my spouse has a total of 7k in her spousal rrsp. If my spouse a month later took out 2k from the spousal rrsp savings account, will that 2k be considered her income or mine ?

Elman;

The income would be considered yours under attribution rules. It would only qualify as her income if she took it out 3 years after the last contribution you made.

Thanks Noblea.
How about this example
I contributed to the spousal rrsp:
Jan 2000 – $5000
Jan 2001 – $5000
Jan 2002 – $5000
Jan 2003 – $5000
Jan 2008 – $2000
my wife withdrew $15000 on March 2008. Is the $15000 considered her income or mine ?
or maybe its considered $13000 her income and $2000 mine ?

i believe 13K would be considered her income and 2K would be yours under attribution rules.

hi FT,

i just received “RRSP INFORMATION FOR 2008”

on my last “Notice of assessment” my RRSP limit was 15619 for the tax year of 2008

but on this RRSP DEDUCTION LIMIT STATEMENT THAT I RECEIVED YESTERDAY IT SAID AT THE BOTTOM:

RRSP DEDUCTION LIMIT FOR 2008 ……….. $41,177 (a)

P.S 2008 total pension adjustment reversal … $25,558

so my question ,should i go and use my 41,177 and get my fat deductions or just stick to 15,619 that i already used in my rrsp invest. account !

thank you

Hey I wonder if you could give me some advice?I am 42 years old wife is forty one.I make 65000 a year she makes 25000.We just paid of our mortgage, and want to start an RRSP for her(I have a company pension)she has none.Should I contribute to spousal RRSP?

LostMan,
Do you mean you want to use the small amount of RSP room you have left after your company pension contribution reduces it, thus lowering your taxes, or do you want to give money to your wife so she can use up all the accumulated RSP allowance she has from years past, thus possibly reducing her tax payable to zero for the next few years?

Spousal RSP uses your contribution room to fund a spouses RSP. You might want to look at a combination of options, to reduce both of your taxes payable to the greatest amount possible — maybe it’s time to play with some tax software, or contact a tax wiz!

I suggest contributing fully to your RSP to get the tax break, and maxing your wife’s by putting as much as yo can into it, and claiming enough each year to get the best tax benefit for her.

DAvid

Hi,
Can someone explain dependent/spousal credit? I have heard about tax credit for dependents, but not for no income spouses. I have no idea of what it is but it might apply to me. I’m a stay home mom with no income except the universal child care benefit and interests earned from our savings. My husband makes about 85K annually. He contributes to spousal RRSP. He’s a lawyer so he will be much higher income than I. Thanks so much.

Lostman/DAvid,

I almost never disagree with DAvid, but I will this time.

Because you have a pension and your wife does not, I suggest that your wife does not contribute to an RRSP but rather a TFSA. In fact, you could give her the money to put into a TFSA.

If you are going to put any money into an RRSP it should be a spousal RRSP in order to balance out your retirement incomes somewhat.

I wouldn’t be able to suggest whether you should first put $ into a spousal RRSP first and then into a TFSA because I don’t have enough information. However, if forced to, my recommendation would be maximum contributions to TFSA’s for both of you first, and then if you have any money left over, contribute to a spousal RRSP.

This will give you signficant non-taxable income in retirement and, according to the experts, RRSP’s are only preferred for those in higher income tax brackets that also reinvest the tax refunds from the RRSP’s (which could be applicable to you, but not your wife due to her $25k income).

Perhaps this calculator might help (it’s not ideal since it doesn’t allow you to put in info for both you and your spouse so you will likely have to run the scenarios for both you and your wife separately and combine the results) –
http://www.taxtips.ca/calculators/tfsavsrrspcalculator.htm