How Does a Spousal RRSP Work?

Are you trying to figure out your spousal RRSP contribution before the tax deadline on March 1^st? Or are you trying to figure out if a spousal RRSP is right for you and your partner? A spousal RRSP can allow you to experience even greater tax benefits and help you maximize your retirement. In this blog, we will discuss the spousal RRSP contribution limit for the 2021 tax season, and we will also explain how the spousal RRSP works and how you can use it to your advantage.

Throughout this blog we will use the term “spouse” to refer to both legally married and eligible common-law partners.

What is an RRSP?

To start, let’s first understand what an RRSP is. A Registered Retirement Savings Plan (RRSP) is like a container for your savings. You contribute your hard-earned money into the plan and can decide to leave it as cash and/or invest it in stocks, bonds, ETFs, etc. With an RRSP, you contribute from your gross income, or you get a tax deduction for contributions made from your net income. Income tax is then deferred until you withdraw from the plan, whether for an emergency, or at retirement. There is a maximum amount you can contribute to your RRSP each year. 

Spousal RRSP Contribution rules

The spousal RRSP contribution limit changes annually. In 2021, the contribution limit is 18% of your 2020 individual earned income, up to a maximum of $27,830, or whichever is lower. If in previous years you do not contribute the maximum amount, you can also carry that extra contribution ‘room’ forward into current years minus pension adjustments.

Your spouse’s contribution limit is not affected by money you contribute to the spousal RRSP.

What is a Spousal RRSP?

A spousal RRSP is set up differently than a personal RRSP. For a personal RRSP you are the plan holder and you contribute to it. With a spousal RRSP, if you are the account holder, your spouse is contributor. Conversely, if your spouse is the account holder, you are the contributor. How you choose to set it up depends on how it benefits you as a couple based on your income. In either case, the person who contributes to the plan is the one who receives the tax deduction.

How does a Spousal RRSP work?

When you make a contribution to the spousal RRSP, the person who contributes will receive a tax deduction. This is particularly helpful in balancing annual taxes and retirement income when there is a significant gap in earnings between you and your spouse. In general, it’s recommended to set up a spousal RRSP in the name of the lower income earner and have the higher income earner contributing to the plan.

For example, Taylor and Sam are legal spouses. Taylor earns $100,000 and Sam earns $50,000.

The maximum Taylor can contribute to an RRSP is $18,000 (18% of $100,000 annual income). The maximum Sam can contribute to an RRSP is $9,000 (18% of $50,000 annual income).

With a spousal RRSP, Taylor can put some of the contribution in a spousal RRSP for Sam. Let’s say Taylor splits the RRSP contribution and puts $14,000 into an RRSP and $4,000 into Sam’s spousal RRSP.

Taylor can still take a $18,000 tax deduction, but at retirement is where you will see a major difference.

How does a Spousal RRSP benefit you at Retirement?

Having a Spousal RRSP can help you balance your retirement income with your spouse to avoid being taxed in a higher income tax bracket.

For example, without a spousal RRSP, Taylor accumulated $1 million in RRSPs and Sam accumulated $400,000. At retirement, they withdraw 4% of their income each year. Taylor receives $40,000 and Sam receives $16,000. Since Taylor and Sam are taxed based on amount of money they receive as income from their RRSPs, Taylor’s RRSP income would be in a much higher tax bracket and would pay more tax on that income.

With a spousal RRSP, Taylor could have $700,000 and Sam could also have $700,000 in RRSPs. They can still receive the same dollar amount of income ($28,000 each = $56,000), but they will pay much less in tax upon withdrawal.

Other Advantages of Making a spousal RRSP contribution?

While the main benefit of a spousal RRSP is for retirement, there are a couple other benefits that you can take advantage of as you make a spousal RRSP contribution.

1. You can continue to contribute to your spouse’s RRSP after you have turned 71 if they are under the age of 71 on December 31^st of the year you make contributions. This allows you to continue receiving the tax deduction into retirement.
2. You can also set up a spousal RRSP to benefit you if you choose to stay at home with the kids or return to school. If you have contributed before you make this decision, it not only gives the contributing spouse a tax deduction while you build it, but the unemployed spouse can withdraw income from the spousal RRSP and pay very little tax on it.

 

Retirement might be a long way away, but your financial decisions now can significantly impact your future. At BIG we want you to be able to achieve your financial goals and enjoy life both now and at retirement. By meeting with a financial advisor, we can help you on the road to financial freedom. You might be thinking that a spousal RRSP is right for you and your partner – if that’s you, contact us to get started on a financial plan that can set you up for success!