Spousal RRSPs in Canada

You likely already know that investing in an RRSP is one of the best, most tax efficient ways to save for retirement. The good news is that if you or your common-law partner or spouse have unequal incomes, you can open and contribute to a spousal RRSP account. 

In doing so, you can maximize the benefits of an RRSP account for you and your spouse, no matter if one of you is not earning an income or earning much less.

Read on to learn more about how a spousal RRSP account works, what the tax implications are, and how to open one with a discount online brokerage, like our top recommended brokerage, Qtrade.

What Is a Spousal RRSP?

A spousal RRSP, like a traditional RRSP, is a retirement savings plan that you can contribute earned and taxed income to, and invest through. One of the best features of an RRSP is that you will usually not pay tax on the income earned on the account while the money remains in it. You can also deduct the amount contributed when filing your annual tax returns. That’s what we call maximum tax efficiency.

The money you earned isn’t taxed because you’ve already paid taxes on the income, but what if your spouse earns less or does not earn an income, therefore has nothing to contribute? 

That’s where the spousal RRSP comes in. This RRSP account will be held in the name of your spouse or common law partner, but the higher income earner is the one contributing funds to the account. 

This has two main advantages, one being that the combined RRSP contribution limit is much higher than a single account, and this could significantly reduce the tax burden on the higher income earner later when it’s time to retire.

How Does a Spousal RRSP Work?

Creating a spousal RRSP is actually very simple. 

First, you’ll need an brokerage account. If you don’t have one already, you can open up an account quickly and easily. 

Once you have opened your own brokerage account, you can open an annuitant account, which will be held in the non or less income earning spouse’s name. This means that even though the person contributing to the account is the annuitant’s spouse or common-law partner, the only person who will be able to make investment decisions and withdraw money from the account will be the annuitant. 

There are great tax benefits in that the contributor will be able to deduct the contributions made to the annuitant’s account on their taxes. 

It is important to note that the contribution limit, which is 18% of your earned income from the previous year, is a total amount that can be contributed to both accounts. This means that once you hit that limit total in the two accounts combined, that is it, you cannot contribute more or you risk facing penalties.

Spousal RRSP vs. Personal RRSP

The main difference between a spousal RRSP and a personal RRSP is that the owner of a regular RRSP is contributing money they themselves earned, and have complete ownership over the account. A spousal RRSP is owned by the annuitant who makes the investment decisions for their account.

Another difference is that while the contributor will be able to score a tax deduction on the amount contributed to both a personal RRSP and spousal RRSP, the annuitant will pay taxes on the amount withdrawn from the spousal RRSP when retirement comes. 

The good news is that they will most likely be taxed at a lower rate when that time arrives, as they will probably be in a lower tax bracket than the contributor.

Why Balance Retirement Income?

To illustrate how all of this would work in real life, let’s look at a hypothetical scenario.

Imagine a married couple in retirement: Terry and Monica Monica. They are drawing down their retirement savings nest egg to cover their $40,000 annual living expense. Imagine two scenarios: 

A) Monica withdraws $50,000 from her RRSP and Terry doesn’t withdraw anything; or 

B) Both Terry and Monica each withdraw $25,000 from their own respective RRSP account.

As a couple, they withdraw the same amount in each scenario but how much of the money do they keep after taxes?

In scenario A, Monica must report $50,000 income on her tax return, her marginal tax rate would be 29.65%, and her average tax rate would be 21.55%. She would have to pay $10,775 in taxes. Terry doesn’t pay any taxes as he does not have any income to report. Together, they keep $39,225.

In scenario B, Monica reports only $25,000 income on her tax return. That puts her in a lower tax bracket compared to scenario A). Her marginal tax rate would be 20.05%, her average tax rate would be 15.24%, and she would therefore have to pay $3,811 in taxes. Terry has the same income and therefore the same $3,811 tax liability. The couple’s combined tax burden is therefore $7,622. Together, they keep $42,378. 

That’s over $3,000 more compared to scenario A – or about one extra Caribbean cruise for the couple just for optimizing their RRSP withdrawals.

These calculations are based on simplifying assumptions that the couple’s only income comes from RRSP withdrawals. Tax rates are calculated assuming the 2020 tax year and that the couple lives in Ontario.

Ideally, Monica and Terry should withdraw about the same amount from each of their RRSPs every year to minimize their combined tax liability. To do this consistently every year for the remainder of their retired life, each of them should ideally have roughly the same sized nest egg to start with.

But if one spouse earns a higher income, it may be tough to grow two equally sized nest eggs. That’s where spousal RRSPs come in. It allows the higher income spouse to contribute to the lower income spouse’s RRSP and balance the growth of both nest eggs.

Spousal RRSP Contribution Rules are Very Simple

Let’s say early on in their marriage, Monica earns a higher income than Terry. Monica therefore, has a higher RRSP contribution and deduction limit. Terry can open a Spousal RRSP with himself as the account holder (AKA: annuitant) and set Monica as a contributor. Then each year, in addition to her own RRSP, Monica can contribute to Terry’s RRSP as well. Monica can deduct contributions to both her own RRSP and Terry’s RRSP from her income. However, the maximum limit Monica can contribute and deduct is calculated based on her own income alone.

Terry does not see any immediate tax benefits from Monica’s contributions. He just gets a boost to his nest egg.

And if later on the roles reverse, say Monica changes to part time work or takes time off to go to school, and Terry becomes the higher income spouse, then Monica can set up a Spousal RRSP with herself as the annuitant and set Terry as a contributor. Terry can then use a portion of his RRSP contribution limit to contribute to Monica’s Spousal RRSP.

The couple works as a team to balance contributions to each of their own RRSPs, aiming to grow their respective nest eggs to the same size by retirement. If they can achieve that, they will be in a great position to minimize taxes when drawing down their nest eggs in retirement.

Spousal RRSP Contribution Limits

The rules around spousal RRSP contribution limits are worth highlighting. A person’s RRSP contribution room can be up to a maximum of 18% of previous tax year’s income (up to a maximum for that particular year – for example, for 2022 it is $29,210).

That contribution room can be decreased by pension contributions during the year. Contribution to a Spousal RRSP uses up the contribution room of the contributor. So when Monica contributes to Terry’s Spousal RRSP, she uses up her own contribution room. And vice versa, when Terry contributes to Monica’s Spousal RRSP, he uses up his own contribution room.

The higher income earner slows down growth of his/her own nest egg to help the lower income spouse catch up on their nest egg.

Attribution Rules: Be Careful when Withdrawing a Spousal RRSP

The whole point of contributing to Spousal RRSPs is to plan for and optimize withdrawals in retirement. But, emergencies can happen, and an early withdrawal could be needed. Just be careful of the pesky attribution rules.

Withdrawals must be reported as income on the contributor’s tax return if the contributor made recent contributions. The amount to report on the contributor’s tax return is the lesser of the withdrawal amount and the total contributions made in the last three calendar years (including year of the withdrawal). Any remaining withdrawal amount must be reported as income on the annuitant’s tax return.

Let’s say in 2021, Terry needs to withdraw $4,000 from his Spousal RRSP (in which he is the annuitant). Monica made contributions to Terry’s Spousal RRSP in 2021, 2020, and 2019 totaling $5,000. That $4,000 withdrawal from Terry’s account must be reported as income on Monica’s tax return.

Then, later in the year, Terry withdraws an additional $3,000 from his Spousal RRSP. Out of that withdrawal, $1,000 must be reported as income on Monica’s tax return. The remaining $2,000 must then be reported as income on Terry’s tax return.

The early withdrawal attribution rules complicates record keeping. Best to avoid early withdrawals from a Spousal RRSP. Use other investment/savings instruments to cover emergencies if you can.

Pension Splitting and Spousal RRSPs

Recall that the optimal tax strategy in retirement is to have each spouse take home roughly the same retirement income each year. We talked about using Spousal RRSPs to grow each spouse’s nest egg to roughly the same size in order to balance withdrawals in retirement. That’s one way to give each spouse equal retirement income. Keep in mind that Spousal RRSP is just one tool at your disposal. Pension splitting is another tool.

Pension splitting allows a retiree (age 65 or more) to designate up to 50% of his/her retirement income to their spouse so that the couple as a unit minimizes their collective tax. Some retirement income isn’t allowed to be split but RRSP withdrawals, RRIFs, and income from annuities are allowed to be split.

Some may argue that pension splitting makes Spousal RRSPs obsolete but I think it’s just another tool in the tool box. Tools can be used together to help you optimize your retirement.

Speaking of Tools

After learning about Spousal RRSPs, be sure to check out Kyle’s in-depth article on Withdrawing from your RRSP, TFSA, and Non-Registered Accounts for Retired Canadians. There is some great advice in that article to help you optimize your retirement income and minimize your tax burden.

The Bottom Line

Tax efficiency is always the goal when it comes to investing for retirement. Spousal RRSPs are a great way to lessen your tax burden, if you are the contributor. It can also help you reduce taxes you pay while in retirement, upwards of thousands of dollars.

Once you do max out on your RRSP there are other options. Check out our full write up on what you can do next while still keeping your tax liability to a minimum: Maxed Out RRSP and TFSA-Now What? 

Couples who invest well together, retire well together. By using the spousal RRSP to your advantage, you will be one step closer to reaching that goal.

Get started today by opening your RRSP account using our top rated online brokerage, Qtrade. Right now they’ve got a great $2,000 cash back promo going on right now. If you want to see how Qtrade stacks up to Canada’s other discount brokerages, check out our recommendations for Best Canadian Online Brokers & Trading Platforms.