Split­ting the dif­fer­ence with spousal RRSPS

They’re handy when one in­come is larger


It seems with ev­ery pass­ing year there’s a new strat­egy to con­sider when plan­ning for re­tire­ment.

Yet tried and true ve­hi­cles such as spousal RRSP con­tri­bu­tions can still play an im­por­tant role in fi­nan­cial plan­ning.

The idea be­hind spousal RRSPs is sim­ple: One per­son (usu­ally the higher-in­come earner) con­trib­utes to a plan that is in the spouse’s name. While the tax de­duc­tion goes to the con­trib­u­tor, the spouse owns the plan and is re­spon­si­ble for paying taxes when the money is with­drawn.

The orig­i­nal in­tent of spousal RRSPs was to al­low for fu­ture in­come split­ting at re­tire­ment, says Diane Kirk­land, a cer­ti­fied fi­nan­cial plan­ner with Ed­ward Jones In­vest­ments in Van­cou­ver. “It was pretty much about build­ing up re­tire­ment as­sets.”

That doesn’t mean spousal RRSPs can’t be used for other pur­poses.

With some strate­gic think­ing and good plan­ning, they can some­times play a part in sup­port­ing a home pur­chase or pre­serv­ing ben­e­fits like old age se­cu­rity (OAS) pay­ments.

“Peo­ple typ­i­cally use spousal RRSPs when there’s a large dis­crep­ancy in in­come,” says Al­lan Small, se­nior in­vest­ment ad­viser with Dun­deeWealth in Toronto.

“The idea is that the funds can be taxed at the spouse’s rate, which could be very low. But they can also be a use­ful tool at any age.”

While there are clear ben­e­fits in re­duc­ing taxes and build­ing a nest egg for re­tire­ment, there are nu­ances peo­ple of­ten over­look, says Richa Hin­go­rani, re­gional fi­nan­cial plan­ning con­sul­tant for RBC in Toronto.

For ex­am­ple, it could be a way for a per­son to pro­long their de­duc­tions as they age. For ex­am­ple, a per­son over 71 might not be able to con­trib­ute to their own RRSP, but can con­trib­ute to a spouse’s if the lat­ter is younger. “That can be a huge ad­van­tage if you want to [re­duce taxes] and con­tinue to build up a re­tire­ment al­lowance,” Hin­go­rani says.

Also, funds from a reg­u­lar RRSP and spousal RRSP can be com­bined for a Home Buyer’s Plan or Life­long Learn­ing Plan.

Th­ese plans al­low you to with­draw funds from an RRSP tax-free if they are put to­ward a first-time home pur­chase or full-time train­ing or ed­u­ca­tion.

The funds must be re­paid to the RRSP within 15 years, how­ever, or the re­main­ing por­tion of the with­drawal will be taxed.

“If you’ve contributed to a spouse’s plan, the ad­van­tages can ac­tu­ally be dou­bled,” Hin­go­rani ex­plains. “With the Home Buyer’s Plan, for ex­am­ple, you could take the $25,000 limit out of each plan to come up with $50,000.”

How­ever, plan own­ers should be mind­ful of the three-year at­tri­bu­tion rule when con­sid­er­ing any with­drawals from a spousal RRSP. It states that if a per­son with­draws funds within three cal­en­dar years of the last con­tri­bu­tion, the in­come will be taxed at the con­trib­u­tor’s rate, not the spouse’s. (One item of note: If you con­trib­ute to a spousal RRSP in De­cem­ber, it counts as a full cal­en­dar year.)

Be­cause of this rule, it’s im­por­tant to plan well in ad­vance when con­sid­er­ing a with­drawal, whether it’s for re­tire­ment or to fund a planned leave of ab­sence or ma­ter­nity leave, Hin­go­rani notes.

Some­times the tides of in­come can shift, and the spouse might make more money fur­ther down the road. At that point you may end up with too much in your RRSP and not qual­ify for OAS, Small says. In that case, he ad­vises de­plet­ing the spousal RRSP funds be­fore re­tire­ment.

When re­tire­ment does come call­ing, it’s im­por­tant to fac­tor in all your in­come re­sources and needs when talk­ing to your ad­viser. There are a num­ber of in­come-split­ting op­tions avail­able that can help a cou­ple max­i­mize their re­turns while min­i­miz­ing the tax bur­den.

“The big pic­ture plan that takes into ac­count all as­pects is im­por­tant,” Hin­go­rani says. “A spousal RRSP is just one of them.”

What­ever the strat­egy, at some point you will have to pay taxes on your spousal RRSP funds, Kirk­land notes.

“That’s where you need a fi­nan­cial ad­viser to de­ter­mine how your spousal RRSP fits into your over­all plan; if it con­tin­ues to be the right choice; and the best in­come split­ting op­tions for you.”


Diane Kirk­land, CFP and fi­nan­cial ad­viser at Ed­ward Jones, says the orig­i­nal in­tent of spousal RRSPs ‘was pretty much about build­ing up re­tire­ment as­sets.’

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