A Spousal RRSP? How thoughtful, dear.
When it comes to buying something special for your mate, certain items just don’t get the heart fluttering. Let’s just say a belated Valentine’s Day gift of half-price chocolates usually won’t go over well. How about a spousal RRSP? Okay, it would also rank low on the romance scale. But, like those discount bon-bons, it can save you a lot of money. And it’s one of the best moves a couple can make for their retirement planning.
What is a spousal RRSP? Provided you still have contribution room, you can put money into an RRSP on behalf of your spouse or commonlaw partner. He or she becomes the owner of the plan. Your contribution is deducted from your overall RRSP limit, but doesn’t affect your spouse’s limit. And, as you would for your own RRSP contribution, you receive a tax deduction.
The key reason for setting up a spousal RRSP – income splitting. Spousal RRSPs are a way for the higher-income spouse to transfer money for future use to the spouse who, in the future, is expected to have a lower taxable income. When the time comes to take money from the spousal RRSP (as long as all contributions to the spouse’s RRSPs have stayed in the plans for the current year and the two previous calendar years), all of the withdrawals may be taxed in the hands of the lower-income spouse, who will ideally be in lower tax bracket.
A retired couple with unequal incomes can leave one spouse with a heavy tax burden. In fact, the best-case scenario for a spousal RRSP is when the plan owner expects to have very little income in retirement, while the contributing spouse expects a sub- stantial amount of income. Generally, a retired couple with two modest incomes will pay less than a couple where one spouse reports all the household income.
Another key benefit of spousal RRSPs is retirement savings flexibility. When you’re over 69, you’re not eligible to contribute to your own RRSP. But if your spouse is 69 or younger, and you still have contribution room, you can put money into a spousal RRSP. So you can continue building your family’s retirement savings beyond your cut-off age for RRSP contributions.
Talk to a financial institution about the best strategy for spousal RRSPs. It may not be the most romantic gift. But there’s plenty of chances to make up for it using all of the money you’ll save.