As most people know that a Registered Retirement Saving Plan - (RRSP) is ideal for long-term savings such as saving up for your retirement, and it offer tax-deferred savings (meaning that your investments grow tax-free until you start withdrawing funds). However, did you know that you can also contribute to your common-law or married spouse’s RRSP? In doing so, you can help your spouse or partner build their retirement nest egg. At the same time, you can lower the amount of tax that you pay collectively. Here’s a brief introduction of what a spousal RRSP has to offer and how it works.
A spousal RRSP can give you a tax break now
When you contribute on behalf of your spouse, you get the tax deduction. So if you earn significantly more than your spouse, you’ll get a bigger tax break by contributing to a spousal RRSP, than your spouse would by contributing to his or her own RRSP.
Whether you contribute to your own or to a spousal RRSP, your contribution counts against your own RRSP deduction limit.
Your RRSP deduction limit is the maximum RRSP contribution you can claim as a deduction on your income tax return for the current year. Your spouse’s contribution limit isn’t affected, however, by your contribution to a spousal RRSP.
A spousal RRSP can also give you a tax break later during retirement
For example, you’re with the higher income and you need to withdraw a total of $4,000 a month as a couple, from your RRSPs. Your spouse can withdraw a bigger share of that $4,000 from their RRSP. This will allow you to withdraw less from yours. This could result in an income tax reduction for your family in total.
There are specific rules for spousal RRSP contributions
After you’ve made a spousal RRSP contribution, spousal RRSPs are subject to a number of rules.
a. The money belongs to your spouse. They control the account and when the money is withdrawn, it’s taxed as their income as long as certain conditions are met.
b. You can contribute to an RRSP until the RRSP owner turns 71. Let’s say you're over 71 and can no longer contribute to your own RRSP, but your spouse is younger. In this case, you can both still benefit. If you still have earned income and RRSP contribution room, you can keep putting money in a spousal RRSP and defer your taxes while your spouse’s RRSP grows, until they turn 71.
Early withdrawals from a spousal RRSP can be costly
It’s important to remember that spousal RRSPs are meant for long-term retirement savings, not short-term tax shelters. That’s why Canadian government imposes a penalty if you withdraw money within three years of contributing to a spousal RRSP.
In general, if your spouse withdraws money from their RRSP, it’s taxed at their rate. But if your spouse withdraws money within three years of a contribution from you, you’ll have to claim that withdrawal as your taxable income, not your spouse’s.