First, a quick recap: What is an RRSP?
When you contribute to an RRSP, you get to deduct the contribution amount from your taxable income for the year. In many cases, this will trigger a tax refund. That’s the first benefit of an RRSP.
The second benefit of an RRSP is that you can invest your money and pay no tax on the profits - at least, not until you eventually start making withdrawals. But by then, you should be retired and in a much lower tax bracket than you are today.
The main benefit of an RRSP is to avoid taxes while you are still working and taxed at a higher rate, and postpone them until years in the future when you are no longer working and taxed at a lower rate.
And now the twist: Spousal RRSPs
Imagine a couple where one spouse is a relatively high earner and the other is a relatively low earner. In this case, it makes sense for the higher earner to make the RRSP contributions, since they are paying more income tax and will benefit from greater savings.
However, fast forward to retirement, and a couple like this will have a problem. Since all of their RRSP savings will be in the name of the high earner, all of the income will be in their name too, and that could land them right back in a high tax bracket.
A spousal RRSP fixes this problem by allowing the high-earning spouse to make the contributions and get the tax breaks today, but the lower-earning spouse to receive the income in retirement. In other words, it can help a couple even out their income during retirement, which can keep them both in lower tax brackets and save a bundle on their overall household tax bill.
Here’s an example:
Sally works for the CAF and expects to receive $60,000 per year from her pension when she retires. Her husband, Joe, runs a small business and has no pension.
Sally sat down with a SISIP Financial Advisor to run the numbers, and found out that if she keeps contributing to an RRSP in her own name, it will give her another $30,000 per year in retirement income. That’s $90,000 per year in total income - enough to push her well into the highest tax bracket.
If Sally instead contributes to a spousal RRSP, she’ll still get the tax break when she contributes, but Joe will receive that $30,000 per year in retirement income. It’ll be virtually tax-free for him, since he will have little other income and be in the lowest tax bracket.
Now the couple will still have $90,000 per year in household retirement income, but they will save thousands per year in tax.
Another strategy: When one spouse is younger
If one spouse is younger, that might be another reason to consider a spousal RRSP. Canadians can contribute to RRSPs until age 71, however, an older spouse can continue to contribute to a spousal RRSP on behalf of a younger spouse, and still get a tax rebate.
Careful when making withdrawals
Always check with your SISIP Financial Advisor before taking money out of your investments. Here are two pitfalls to avoid.
First, if you or your spouse must make an RRSP withdrawal while you’re still working, take money from the account owned by the lower income earner. The withdrawal will be taxable and this will help minimize the tax impact.
Second, if a withdrawal is made from a spousal RRSP within the first three calendar years of a deposit, it will be taxed as income for the contributing spouse, which could be a costly mistake.
Call your SISIP Financial Advisor to find out if contributing to a spousal RRSP can help you grow your wealth and establish your retirement income in a more tax-efficient manner.
Note: The 2023 RRSP deadline is February 29, 2024.
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SISIP Financial, February 16, 2021
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This article was written, designed and produced by SISIP Financial, for the benefit of SISIP Financial, Investment Funds Advisor, a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
