What you should know about spousal RRSPs 

If you and your partner earn significantly different incomes with one spouse earning more or having more in savings than the other, a spousal Registered Retirement Savings Plan (RRSP) is a way to help couples split their retirement savings with the goal of evening out their savings.

This savings vehicle is available to both spouses and common-law partners in Canada. But often, people aren’t aware of the advantages of spousal RRSPs — and may potentially end up paying more taxes than they need to in their retirement years.

Here's what you need to know about spousal RRSPs.

A spousal RRSP is a type of retirement savings plan (RSP) that you can contribute money to each year to help save for your spouse or common-law partner's retirement. 

A spousal RRSP is similar to an individual RRSP but allows a spouse to make contributions to their partner’s RRSP account. Like with an RRSP, contributions to a spousal RRSP are tax deductible, and money earned in the plan grows tax-deferred until retirement.

With a spousal RRSP, the higher-income-earning spouse can make contributions to their lower-income-earning partner’s account and receive a tax deduction, while the spouse receiving the funds — called the annuitant — gets the benefit of building up their retirement savings. In short, the higher-income-earning spouse contributes and gets tax savings on their income, while the lower-income-earning spouse builds up savings to withdraw in retirement, with the goal of the couple lowering their overall taxes in retirement.

A spousal RRSP is an effective way to:

• ✓           Lower taxes for the higher-earning spouse
• ✓           Fund a lower-earning spouse’s retirement savings
• ✓           Provide an effective way to split income in retirement to lower the couple’s overall tax burden

With a spousal RRSP, one partner is the owner of the account (or annuitant), while the other partner is the contributor (typically the higher-income-earning spouse). The amount an individual can contribute to a spousal RRSP depends on the contributor’s overall RRSP limit. Only the contributing partner receives a tax deduction for a spousal RRSP contribution.

An individual’s total contribution room available applies to both their individual and spousal RRSP (as well as any other RRSP they’re contributing to, such as a group RSP). For example, if their contribution limit is $10,000, they could contribute $8,000 to their individual RRSP and $2,000 to their spousal RRSP.   

To recap:

• ✓          Only the higher-income-earning spouse who contributes to the account can claim a deduction on their income tax return
• ✓          The lower-income-earning spouse is the owner of the account and, as such, controls the account
• ✓          The contributing partner must stay within their overall RRSP contribution limit for the year when contributing to a spousal RRSP. Remember to check your contribution limit with the Canada Revenue Agency (CRA) before making a contribution.

Many couples might not consider a spousal RRSP when they each have their own RRSP. But once they understand the advantages, they’ll see why setting one up may be worth their while — especially where taxes are concerned. But there are disadvantages to be aware of, too.

The tax advantages of a spousal RRSP include:

• Reduction in taxable income: Every dollar one contributes to their personal or spousal RRSP reduces their taxable income for the year, by an equal amount, up to the contribution limit for the person making the contribution. This is ideal for high income earners — it allows them to reduce their taxable income, since the partner who contributes to the spousal RRSP receives the income tax deduction for the deposited amount.
• Potential tax break later: The long-term goal of investing in a spousal RRSP is to minimize taxes for a couple during retirement by putting retirement income in the hands of the lower-income spouse.

By opening a spousal RRSP, you're essentially income splitting when you eventually draw down on these funds in your retirement years.

The higher-income earner moves their savings to their lower-income-earning spouse. Then, when both retire, their incomes are more equally balanced, which may reduce the taxes they owe. If they keep their savings separate, the higher-income earner could remain in a higher tax bracket during retirement.

Setting up a spousal RRSP may be ideal for couples who expect a significant difference in their retirement income.  It’s more advantageous from a tax perspective to have two people in a lower tax bracket rather than one person in a higher tax bracket.

Just like every coin has two sides, the spousal RRSP has tax disadvantages, too. These include:

• Contributor has no control over funds contributed or how they’re invested: Since the account belongs to the annuitant, only they can withdraw funds and decide how to invest them — no permission from the contributor needed.
• Early withdrawals that negatively impact tax-deferral benefits: Similar to a regular RRSP, withdrawals from a spousal RRSP are taxed the year they’re made. Since many people are in a lower tax bracket when they’re retired, withdrawing spousal RRSP funds early may result in paying more taxes, as well as no longer having those funds during retirement.
• Limited contribution room: The contributing partner’s contribution room is split between their own RRSP and the spousal RRSP. If they use their contribution room on their spousal RRSP, they’ll have less to contribute to their own RRSP.
• Attribution rule: If the annuitant withdraws a contribution their partner made to their spousal RRSP within three years, the contributing partner is required to pay taxes on the amount withdrawn (more on this below).

The Canada Revenue Agency (CRA) states that any spousal RRSP contributions cannot be withdrawn for three calendar years from when the contribution was made without there being tax implications for the contributor, and potentially the annuitant or owner.

In the case of a spousal RRSP, withdrawals are taxed in the hands of the annuitant or owner, as long as three years have passed from the spouse’s last contribution to a spousal plan. If money is taken out before that time, the withdrawals must be reported on the contributing spouse’s tax return up to the amount of the contribution.

The three-year rule doesn’t apply if either spouse dies, if you or your spouse are non-residents, or if the two of you are separated due to the breakdown of your relationship at the time of the withdrawal.

You can open a spousal RRSP at a financial institution:

• In person: Book an appointment if you’d like on-site staff to assist you. This ensures they can allow the appropriate amount of time to help you open a spousal RRSP.
• By phone: A financial advisor or service representative can help you open your spousal RRSP over the phone.
• Online: Some financial institutions will allow you to set up a spousal RRSP online at your convenience. 

If you’re the owner (annuitant) of a spousal RRSP, you — and only you — can make a withdrawal at any time. But either you or your spouse will be taxed on your withdrawals.

During the three-year attribution period, the spouse who made the contributions will be taxed on your withdrawals — but only on the contribution amount they made (refer to section above “What is the spousal RRSP three-year attribution rule”).

If you, as the owner, make a withdrawal after the three-year attribution period, you’ll pay tax on the entire withdrawal.

For example, let’s say your spouse contributed $5,000 to your spousal RRSP within the three-year attribution period. You withdraw $7,000 during those three years. In this case, your spouse will be taxed on the $5,000, and you’ll be taxed on the remaining $2,000.

Although you cannot contribute to your RRSP after December of the year you turn 71 years old, you can still contribute to your spouse's or common-law partner's RRSP until the December of the year that they turn 71.  At that time, the spousal RRSP must be converted into a Registered Retirement Income Fund (RRIF).

The year after opening your RRIF, you must start withdrawing at least the annual minimum payment (AMP) from the RRIF. Set by the Canada Revenue Agency (CRA), the AMP increases as you get older.

The key to strategically using a spousal RRSP for retirement is teamwork. Spousal RRSPs remain one of the most effective ways for couples to help reduce taxes and maximize retirement income.

Ways to make the most out of a spousal RRSP:

• Home Buyers’ Plan (HBP): Maximizing a spousal RRSP means eligible first-time homebuyer couples can double their HBP. If each individual has their own RRSP, they can withdraw up to a maximum of $60,000 each, for a combined total of up to $120,000.
• Balanced retirement income:  A spousal RRSP allows for more equal retirement savings between higher and lower income generating spouses. This balanced approach to retirement savings results in lower potential taxes upon withdrawal each year of retirement. This “split income” strategy can help build a nest egg that provides each spouse with a source of income in retirement and a way to manage taxes efficiently.

Many couples struggle balancing income between spouses when it comes to retirement planning. For couples whose incomes differ significantly, a spousal RRSP offers an effective way to achieve greater financial balance in retirement.

It creates tax advantages for the higher-income-earning spouse who will get tax deductions for their contributions, while the lower-income-earning spouse benefits from building up their savings for retirement. A spousal RRSP offers couples an effective way to save for their future while potentially lowering their family’s overall tax bill and keeping more of their retirement savings.