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What is a Spousal RRSP? Contribution & Withdrawal Rules
Dec 11, 2023
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Key takeaways
- Income Splitting: Spousal RRSPs help balance retirement incomes, potentially lowering overall taxes by withdrawing from accounts with lower tax implications.
- Tax Deductions: Contributions to a spousal RRSP are tax-deductible for the higher-earning spouse, boosting retirement savings for the lower-income spouse.
- Three-Year Attribution Rule: Contributions to spousal RRSPs are taxed to the contributor if withdrawn within three years, impacting tax planning.
- Flexibility and Control: The lower-income spouse owns and controls the spousal RRSP, deciding on investments and withdrawals for retirement planning flexibility.
What’s in this article?
- What is a spousal RRSP?
- How do spousal RRSP work?
- Advantages of a spousal RRSP
- Disadvantages of a spousal RRSP
- Withdrawals and Attribution rules
What is a spousal RRSP?
A spousal RRSP is a type of registered retirement savings plan (RRSP) that’s available to married couples and common-law partners. It allows couples to split their income and grow their retirement savings while lowering the amount of tax they pay together. It lets married and common-law couples:
- Even out retirement savings between 2 partners
- Split their income after they retire by withdrawing from their annuity or registered retirement income fund (RRIF)
- Reduce the amount of income tax they pay
How do spousal RRSPs work?
A spousal RRSP is set up in the name of the lower-income spouse (the annuitant), who owns and controls the account. The higher-earning spouse contributes to the spousal RRSP, getting a tax deduction, while the annuitant makes investment decisions and can withdraw funds at any time.
Example Scenario:
If Spouse #1 has a high income and significant retirement savings while Spouse #2 has a lower income and fewer savings, Spouse #1 can contribute to a spousal RRSP for Spouse #2. This aims to equalize their retirement incomes, thus lowering their overall tax burden. Instead of one spouse having $100,000 taxed at a higher rate, both spouses could receive $50,000 each, resulting in lower total taxes.
Key Points:
- Contributions can be made to either a personal RRSP, a spousal RRSP, or both.
- In case of divorce or separation, spousal RRSPs can be split and transferred tax-free.
- Spousal RRSPs must be converted to a RRIF or an annuity by the end of the year the annuitant turns 71.
Advantages of a spousal RRSP
Tax deduction
Spousal RRSP contributions lower the contributor’s taxable income either in the year of contribution or carried forward to future years if desired.
Income splitting
When couples retire and withdraw funds from their RRIF or annuity, they can split income to help pay less income tax.
Home Buyers’ Plan
If you’re buying your first home, you can borrow up to $35,000 from your RRSP as part of the Home Buyers’ Plan. A spousal RRSP lets couples access up to $35,000 each for a total of $70,000.
Lifelong Learning Plan (LLP)
To finance full-time training or education you can withdraw up to $10,000 per calendar year, to a total of $20,000.
Contributions after age 71
You can’t contribute to your own RRSP after Dec. 31 of the year in which you turn 71. However, if your spouse is younger than 71, you can continue to contribute to their spousal RRSP if you have contribution room.
Disadvantages of a spousal RRSP
Three-year attribution rule
From the time a spousal RRSP contribution is made, it must stay in the account for the rest of the calendar year plus 2 more years before money can be withdrawn as the annuitant’s taxable income. If money is withdrawn within 3 years, it will be included in the contributor’s taxable income.
This rule doesn’t apply to Home Buyer’s Plan or Lifelong Learning plan withdrawals, which can be made within 3 years of a contribution. This rule also doesn’t apply to for spousal withdrawals after the relationship ends, or if the contributor dies during the year of the withdrawal.
The 3-year attribution rule doesn’t apply to the minimum amount of a RRIF payment, but would apply for any amount over the minimum.
Otherwise, withdrawal rules for a spousal RRSP are the same as a regular RRSP.
Spousal RRSP Contributions, Withdrawals and Attribution rules
Your RRSP contribution limit remains unchanged whether you have one account or multiple accounts.
Spousal RRSP Contributions:
Contributing to your partner’s spousal RRSP allows you to claim a tax deduction. However, these contributions come from your own RRSP contribution room and do not affect your spouse’s RRSP room.
After making a contribution to a spousal RRSP, the funds become the property of your spouse or common-law partner. They have control over the account, including investment decisions and withdrawal timing.
You can contribute to a spousal RRSP until the end of the year your spouse or common-law partner turns 71. If you are over 71 and unable to contribute to your own RRSP, but your spouse is younger, you can still make contributions to their spousal RRSP to reduce your joint tax liability.
Spousal RRSP Three-Year Attribution Rule:
A three-year attribution rule applies to spousal RRSPs when you make a contribution. This rule means that if your spouse withdraws funds within the current year or the following two years, you (as the contributor) may be taxed on those withdrawals. Certain exceptions may apply.
Spousal RRSP Withdrawal Rules:
Since the spousal RRSP belongs to your spouse, only they can withdraw funds from it. Withdrawals are subject to the three-year attribution rule, where withdrawals made within three years of your contribution may be attributed back to you for tax purposes.
It’s generally advisable to make RRSP withdrawals later in life when you may be in a lower tax bracket, resulting in lower taxes paid on your withdrawals. For personalized advice, consult with a financial advisor familiar with RRSP strategies.
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