A spousal RRSP is a type of registered savings account that married or common-law couples can use to save for retirement. Essentially, it allows the couple to split their RRSP contributions and withdrawals so they benefit from tax deductions and even lower marginal tax rates during retirement.
The account is opened in the name of one spouse or partner, but the other partner makes the contributions. Ultimately, the goal is to create a situation where both partners can withdraw similar amounts from their RRSPs during retirement.
There are some different contribution and withdrawal rules and a list of pros and cons to consider, but if there's a big difference between you and your partner's annual incomes, a spousal RRSP could be exactly what you've been looking for.
Key Takeaways
- A spousal RRSP is a registered savings account for couples saving for retirement.
- While a spousal RRSP is officially held by one partner/spouse, the other partner/spouse is the one who makes contributions.
- Contribution rules and limits are the same for both spousal and personal RRSPs.
- Pros of spousal RRSPs include income splitting, tax deductions, and the ability to make contributions after the age of 71.
- Downsides include the 3-year attribution rule, contribution rules, and withdrawal rules.
What is a spousal RRSP?
A spousal RRSP is a registered savings account that allows a higher-income earning spouse to contribute to their partner's RRSP. The account is held in one partner's name but contributed to by the other partner. This allows for short-term tax deductions and evens out withdrawals during retirement.
The spouse with higher income is the one who opens the spousal RRSP. Why? Because it can be helpful for couples who earn different levels of income to split their income with this type of long term plan.
Think of it like this: if Stan makes more money than Christy and is able to contribute more to his RRSP than she is, his total savings and source of retirement income will be much more than her's during retirement. And if they both withdraw the same percentage amount from savings when the time comes, Stan will likely be taxed at a higher rate than Christy.
And this, in turn, means a higher tax bill that they'll have to deal with.
On the other hand, if Stan opens an account and makes a regular spousal RRSP contribution and they both make a regular contribution to their personal RRSPs, their tax bill will be lower. This is because Christy's lower income puts her in a lower tax bracket.
Spousal RRSP and personal RRSP
Individuals can have a spousal RRSP, a personal RRSP, or both – they can even be held with different financial institutions. In fact, it can often be helpful for the higher-earning spouse to have both.
However many RRSPs you hold, you still only have the same RRSP contribution limits as if you just had one account. With a spousal RRSP, personal RRSP, or a combination of the 2, your contribution room is based on the income you earned in the previous year, plus any unused room from previous years.
You can distribute this contribution room as you like between your retirement accounts, but you can't go over the limit.
Here are a few more details to consider when deciding whether or not you should open personal and/or spousal RRSPs:
- Combinations and transfers are options too. You might choose to combine a spousal RRSP with a personal RRSP or to transfer a personal RRSP into a spousal one on a tax-deferred basis.
- While it is possible to take a spousal RRSP and convert it to a personal RRSP, this is usually only done in cases where the relationship has ended, either due to a breakup or death. It's your choice whether or not to do this, but you'll likely still have to adhere to the 3-year attribution rule if you decide to convert things.
Who's best situated to reap the benefits of a spousal RRSP?
As you can probably tell, the spousal RRSP investment strategy isn't going to work for everyone – there are candidates and situations that are more suited to it than others.
Here are some situations where this type of retirement planning would be ideal:
- You and your partner are hoping to have children in the next few years and the person with lower income wants to take extended parental leave. Partner 1 can make regular RRSP spousal contributions and benefit from the tax break, and as long as the 3-year attribution rule doesn't conflict, the stay-at-home partner can withdraw from the account at a lower tax rate. Keep in mind, though, that in this situation, they'll still have to pay a withholding tax.
- First time home buyers want to take advantage of the Home Buyers' Plan, which allows them to withdraw up to $35,000 without penalty. If one partner has a spousal RRSP and the other a personal RRSP, they can withdraw this amount from each account and put it towards the down payment.
- When one partner in a relationship is several years younger than the other, a spousal RRSP can really help in later years. When the older partner reaches the age of 72 (or December of their 71st year), and can no longer contribute to their own RRSP, they're still able to make regular spousal RRSP contributions on the other partner's behalf. This can continue until the younger partner reaches the age/time limit for contributions themselves.
Spousal RRSP contribution rules
Just as there are rules and parameters for personal RRSPs, there are spousal RRSP contribution rules as well. They aren't that different from the typical guidelines, but it's still a good idea to review and take notes.
- Who can contribute: Only the spouse who opened the account can make contributions to the spousal RRSP. So if Stan opened an account for Christy, Stan is the only one who can make contributions, even though the account is technically under Christy's name and kept for her retirement.
- Age restriction: The person who opened the account can continue making contributions until December 31 of the year the person the account is for turns 71. So if Stan is older than Christy, he can continue making contributions to the spousal account even after he turns 71.
Spousal RRSP withdrawal rules
It's only the plan holder, the spouse whose name is on the account (typically the one with the lower income), who can withdraw funds.
Among other purposes, these accounts allow the lesser-earning spouse to withdraw the funds at a lower tax rate than if the higher-earning spouse had contributed to their personal RRSP – although, as previously mentioned, individuals are certainly able and allowed to contribute to their personal RRSPs as well.
The 3-year attribution rule
The 3-year attribution rule means that you can't withdraw funds from a spousal RRSP until the end of the calendar year, plus 2 more full years after the last contribution. Otherwise, it counts as taxable income for the contributing party.
This way, the higher-earning partner isn't able to temporarily shelter funds under the lower-earning spouse’s name.
Take a look at a few examples laid out in the table below, showing contribution dates and acceptable withdrawal dates.
| Date of contribution | Acceptable date for withdrawal |
|---|---|
| December 5, 2019 | January 1, 2022 |
| July 13, 2020 | January 1, 2023 |
| January 28, 2023 | January 1, 2026 |
How a spousal RRSP can help save on your taxes
Just as a typical, personal RRSP offers a few very convenient and helpful tax breaks, spousal RRSPs can also offer tax breaks.
Contributing to a spousal RRSP provides tax deductions, just as a personal RRSP does. Whatever you contribute to the account, you can deduct it as taxable income when filing your taxes – keeping in mind the contribution rules and amounts for that particular year, of course.
But in this case, the higher-earning partner will receive a bigger tax break when contributing to the spousal RRSP than the lower-earning partner would if they simply contributed to their own RRSP.
On top of the immediate tax deductions, a spousal RRSP offers a unique opportunity to save on taxes once you hit retirement too. The extra funds that you added to the spousal RRSP on your partner's behalf allows that partner to withdraw funds at a lower rate when the time comes.
Let's use Christy and Stan for another example.
As we mentioned, Stan was the highest earner in the family, and the couple is now retired. At this point, they need to withdraw about $5,000 per month from their RRSPs. Since Stan contributed to the spousal RRSP on Christy's behalf, she can now withdraw a larger portion of the necessary $5,000 and pay less tax on it.
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There are many benefits associated with spousal RRSPs, including tax deductions, making contributions after you turn 71, and taking advantage of programs like the Home Buyers Plan and/or Lifelong Learning Plan.
- Income splitting: Couples who earn different levels of income can split their income with a spousal RRSP to save on taxes
- Contribution after age 71: If the person who opens the account is older than their spouse, they can continue contributing to the spousal RRSP after they're no longer able to contribute to their personal RRSP.
- Tax deductions: Contributing to a spousal RRSP provides tax deductions, just as a personal RRSP does.
- Access to all personal RRSP perks: You'll still be eligible for programs like The Home Buyers Plan and The Lifelong Learning Plan with a spousal RRSP.
The cons of spousal RRSPs
On the other hand, details like the 3-year attribution rule and both contribution and withdrawal restrictions can make a spousal RRSP tricky to deal with. Here are a few thoughts on the drawbacks of spousal RRSPs.
- Money is locked up for 3 years: The "3-year attribution rule" means that you can't withdraw money until the end of the calendar year, plus 2 more full years after the last contribution.
- Separation makes things complicated.
- Contributions eat into your personal room.
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FAQ
What is a spousal RRSP?
A spousal RRSP is a registered retirement savings plan that allows one spouse/partner to contribute to the other's savings. This way, a partner who earns less than the other can withdraw retirement funds at a lower tax rate.
What are the benefits of spousal RRSP contributions?
There are several benefits of contributing to a spousal RRSP, including being able to take advantage of the Home Buyers' Plan and potential for future tax breaks.
Are there rules about spousal RRSP withdrawal?
The most important withdrawal restriction is the 3-year attribution rule. This rule states that you have to wait 2 full years, plus the rest of the calendar year after the last contribution before you can make a withdrawal.
Who claims a spousal RRSP contribution?
Usually, only the partner who is not the account holder can make contributions. This is mostly because it's typically the account holder who has the lower income, so they can withdraw the funds later at a lower tax rate.
How much can I contribute to a spousal RRSP?
Contribution rules for a spousal RRSP are the same as for all other RRSPs. The contribution limit for 2024 is $31,560 or 18% of your income, whichever is less. The limit for the 2023 tax year is $30,870.
Who pays tax on spousal RRSP withdrawals?
The account holder, or person whose name is on the RRSP, is the one who pays taxes on it. Once the funds are deposited, the money legally belongs to this account holder, so the tax burden falls upon them.
Can I convert a spousal RRSP to a regular RRSP?
Yes, this conversion can be done, but you'll be taxed as per the usual RRSP withdrawal rules. Alternatively, you could choose to convert a spousal RRSP to an RRIF – but there will still be withdrawal taxes to consider.
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