Should you open up a spousal RRSP? It depends on your family income

Respondents to an online poll from BMO reported fewer savings to their RRSPs this season. The deadline to file expired midnight Monday.
Canadian couples with significantly different incomes may want to consider using a spousal RRSP to help cut their tax bill in retirement, but experts say it's all about balance. THE CANADIAN PRESS/Ryan Remiorz

TORONTO – Canadian couples with significantly different incomes may want to consider using a spousal RRSP to help cut their tax bill in retirement, but experts say it’s all about balance.

“It’s not something like: ‘What, you’re married? You should get a spousal RRSP,”‘ said Victor Godinho, an adviser with VTAG Financial Group Inc.

“It’s a real analytical process. (Spousal RRSPs) really make a difference at the withdrawal stage so you want to see, how do they (the couple) plan on living out their lifestyle in retirement? What’s the cost benefit?”

A spousal RRSP is an account that you set up, but that your partner contributes to. They are held separately and open to married or common-law couples.

Godinho said the plans are most beneficial in relationships where one spouse earns significantly more than the other. An example would be if one spouse was working as an executive and the lower-earning spouse worked as a contract worker or a stay-at-home parent.

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Also, if you cannot contribute to your RRSP because of your age, you can still contribute to your spouse’s account until the end of the year they turn 71.

By having a spousal RRSP, a couple is able to divide their retirement savings more equally and hopefully put themselves in a lower tax bracket when they withdraw the money in retirement.

But if a couple already has similar incomes and similar retirement savings and pensions, the benefits of contributing to your spouse’s RRSP may be limited.

Scotiabank senior vice-president Mike Henry said an important factor to remember is that your allowable contribution room does not increase if you put money into a spousal account.

If your contribution limit is $12,000 then you will still only be permitted to put a total of $12,000 into any type of RRSP whether it’s in your name or your spouse’s.

“You’re trying to keep each spouse in a lower overall tax bracket,” explained Henry. “It’s about balancing retirement savings and balancing future savings. It doesn’t change anything about contribution room.”

H&R Block Canada senior tax analyst Caroline Battista said couples who plan on retiring early – before age 65 – benefit from having a spousal RRSP because they can divide the RRSP withdrawals between them.

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If all the RRSP funds are under one spouse’s name, the couple could have to pay more tax if withdrawals were made before the age of 65, before they could take advantage of pension income splitting rules.

But Battista said a major caveat on a spousal RRSP is that the spouse cannot withdraw from the plan for three calendar years after the last contribution, or that withdrawal will be taxed against the contributing spouse. This rule discourages a higher income earner to temporarily shelter funds under their lower income earning spouse’s name.

Couples should also keep in mind that money put into a spousal RRSP belongs to the person whose name is on the account – which can lead to issues if a divorce or separation occurs.

In the end, Battista said one of the biggest reasons some of her clients have chosen to have a spousal RRSP is for piece of mind.

“A spousal RRSP can give a spouse who is earning no or little income a lot of comfort knowing that they have some (retirement) money,” she said. “That it’s in their name.”

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