With the RRSP deadline fast approaching — March 3 — you might be looking to top up your RRSP. But if you have a spouse or common-law partner, it might make more sense to contribute to a spousal RRSP for them instead.
A spousal RRSP is a plan where you contribute the funds based on your contribution room to an account that is held by your spouse or common-law partner. You get the RRSP deduction for tax purposes, while your spouse keeps the funds. I have a rather cynical friend who refers to a spousal RRSP as prepaid alimony. It’s not hard to figure out what happened in that marriage.
This type of plan can make very good sense for a variety of reasons and could be a great fit in your financial plan to maximize your tax deductions and minimize the taxes you will pay in retirement through income splitting.
If you and your spouse are in different tax brackets, the spouse with the higher income can contribute to the other’s spousal RRSP, thereby generating a higher household tax refund while building up the retirement savings for the receiving spouse.
It makes good financial sense to balance your incomes while in retirement and planning for the eventual drawdown of your retirement savings should begin well before you need the income. This may involve keeping your RRSP accounts fairly even in value as they grow, particularly if neither of you has a company pension.
Since 2007, we have been able to split 50% of our pension income in retirement, but RRSP income still cannot be split until after reaching the age of 65. If your spouse decides to retire prior to age 65 and would like to hold off taking their CPP, a spousal RRSP will have built up funds to provide for that income.
After you turn 71, you are no longer able to contribute to your own RRSP, but if your spouse is younger than you and you have sufficient RRSP contribution room, you can contribute to their spousal RRSP and still generate an income tax deduction for yourself.
It is also a good plan for younger couples who are looking to use their RRSPs for a down payment on a house. You can use up to $25,000 from your RRSP for the Home Buyers Plan. Once you have saved enough in your own RRSP, if you still have the contribution room, you can contribute to your partner’s spousal RRSP, which is also eligible for this plan, thereby doubling the value of this program for you.
You can own both a regular RRSP and a spousal RRSP and they have similar characteristics with one exception: once contributed to a spousal RRSP, the funds have to stay there for three calendar years.
If withdrawn from the plan less than three calendar years after being contributed, the funds are taxed back as income to the spouse who contributed them.
A spousal RRSP is another tool to have at your disposal as your life unfolds. And just like any other useful tool in the workshop, it is better to have it and not need it than need it and not have it.
Doug Riding BA, CFP, FMA, is a senior investment adviser with IPC Securities Corporation, www.ridingteam.ca