The ABCs of Spousal RRSPs
January 30, 2024
A spousal* RRSP is exactly what it appears to be
, quite simply a Registered Retirement Savings Plan (RRSP) for a spouse; a plan that cannot only help set aside funds for you and your spouses’ retirement, but can save you some tax dollars in the process. The idea is that one person, typically the higher earner, contributes money to the spousal plan on behalf of their spouse. The primary benefit is that a contribution can be made each year and the receiving spouse will see a tax- free return until those assets are withdrawn.
A spousal RRSP is typically utilized when one spouse has significantly more money in their RRSP than the other. By splitting the invested amount between an RRSP and a spousal RRSP, both of you can enjoy retirement dollars and pay less tax overall by withdrawing the funds when you are both in a lower tax bracket.
Let’s see how this works – Assume you earn $100,000 and your spouse earns $50,000. With RRSP contribution limits of 18%, you can deposit $18,000 and your spouse can deposit $9,000 to your respective RRSPs. However, if using a spousal account, you can deposit, let’s say, $13,000 to your own account and $5,000 to the spousal account. Your total contribution is still $18,000, but divided over two accounts, allowing you to split the income with your spouse. Your spouse can still deposit their original $9,000 into their account. The scenario becomes quite different without a spousal RRSP: let’s imagine that you have $1 million upon retirement and your spouse has $400,000 at this same time. A standard 5% withdrawal rate would result in taxable income of $50,000 for you and $20,000 for your spouse, with your $50,000 annual withdrawal taxed at a higher rate. If a spousal RRSP had been set up, both accounts could have accumulated $700,000 each (same total amount) and taken out an annual income of $35,000 per spouse, resulting in tax at a lower rate. A spousal RRSP can also be used to save on taxes if one member of the couple is over 71 years of age but the other is not. When a spousal RRSP is opened, contributions can be made on behalf of the spouse who is not over 71 - and claim the income deduction on that deposit. In addition, spousal RRSP payments can still be made in the year of death.
It is worth noting that contributions to a spousal RRSP must remain in the fund for three calendar years from the year they are contributed or else the withdrawal amount will be added to your net income for that year and taxes will have to be paid at your tax rate.
*spouse includes a common-law partner The contents of this publication were researched, written and produced by The Link Between ( https://www.thelinkbetween.ca/ ) and are used by Echelon Wealth Partners Inc. for information purposes only
Let’s see how this works – Assume you earn $100,000 and your spouse earns $50,000. With RRSP contribution limits of 18%, you can deposit $18,000 and your spouse can deposit $9,000 to your respective RRSPs. However, if using a spousal account, you can deposit, let’s say, $13,000 to your own account and $5,000 to the spousal account. Your total contribution is still $18,000, but divided over two accounts, allowing you to split the income with your spouse. Your spouse can still deposit their original $9,000 into their account. The scenario becomes quite different without a spousal RRSP: let’s imagine that you have $1 million upon retirement and your spouse has $400,000 at this same time. A standard 5% withdrawal rate would result in taxable income of $50,000 for you and $20,000 for your spouse, with your $50,000 annual withdrawal taxed at a higher rate. If a spousal RRSP had been set up, both accounts could have accumulated $700,000 each (same total amount) and taken out an annual income of $35,000 per spouse, resulting in tax at a lower rate. A spousal RRSP can also be used to save on taxes if one member of the couple is over 71 years of age but the other is not. When a spousal RRSP is opened, contributions can be made on behalf of the spouse who is not over 71 - and claim the income deduction on that deposit. In addition, spousal RRSP payments can still be made in the year of death.
It is worth noting that contributions to a spousal RRSP must remain in the fund for three calendar years from the year they are contributed or else the withdrawal amount will be added to your net income for that year and taxes will have to be paid at your tax rate.
*spouse includes a common-law partner The contents of this publication were researched, written and produced by The Link Between ( https://www.thelinkbetween.ca/ ) and are used by Echelon Wealth Partners Inc. for information purposes only
Disclaimers
Echelon Wealth Partners Inc.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them.
Echelon Wealth Partners Inc.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them.
