What is a Spousal RRSP?
A spousal RRSP is a Registered Retirement Savings Plan set up in one partner’s name but funded by contributions from the other partner. This arrangement is especially useful when one spouse earns significantly more than the other.
Here’s the key: The contributing spouse gets the immediate tax deduction, while the funds grow in the account of the lower-income spouse. When it’s time to withdraw the money in retirement, it’s taxed at the lower-income spouse’s rate, often saving the couple money on taxes overall.
Why Spousal RRSPs Work for Military Families
In military families, one spouse is often the primary breadwinner due to the demands of service. The other spouse may have a reduced or inconsistent income due to frequent relocations or childcare responsibilities. This income imbalance can create challenges in retirement, as the higher earner’s income from a CAF pension plus their RRSP could push them into a steep tax bracket.
A spousal RRSP helps balance this disparity by allowing the lower-income spouse to build retirement savings in their own name. Here’s why this matters:
- Lower Overall Tax Burden: Income splitting in retirement means less tax paid as a couple.
- Greater Financial Independence: The lower-income spouse has their own source of retirement income.
- Flexibility for Life’s Changes: If the lower-income spouse re-enters the workforce later, they can still decide to open an individual RRSP.
How Spousal RRSPs Work
- Contributions: The higher-income spouse contributes to the spousal RRSP.
- Tax Deduction: The contributor gets a tax deduction for the amount contributed, the same as they would with their own RRSP.
- Investment Growth: The investments grow tax-deferred, just like in a regular RRSP.
- Withdrawals: When funds are withdrawn in retirement, they’re taxed at the lower-income spouse’s rate.
Keep in mind that the contributions count against the higher-income spouse’s RRSP contribution room, and if funds are withdrawn within three calendar years of a contribution, the contributor may face taxes on the withdrawal.
It’s also good to know that contributions can continue until the recipient spouse turns 71. This means that, if the contributing spouse is older, they can keep saving taxes even when they are past the age limit.
A SISIP advisor can help you navigate all the rules and strategies related to spousal RRSPs.
A Real-Life Example
Let’s say Corporal Smith is the primary earner in their family, while their spouse, Alex, works part-time or not at all due to frequent relocations. Without a spousal RRSP, Corporal Smith might retire with a significant pension and a large RRSP, and face significant taxes on withdrawals.
By contributing to a spousal RRSP for Alex, Corporal Smith can:
- Reduce their taxable income now
- Help Alex build retirement savings in their name
- Reduce the couple’s combined tax bill during retirement when Alex withdraws from their RRSP at a lower tax rate
A spousal RRSP allows both partners to share the financial benefits of a military pension and their personal investments, while minimizing tax.
Talk to a SISIP Advisor
Every family’s situation is unique. A SISIP advisor can help you understand how a spousal RRSP fits into your overall financial plan. Together, you can crunch the numbers, consider the options, and find the best strategy for your family.
Whether it’s reducing your tax bill now or setting up a smoother financial future, a spousal RRSP could be the missing piece of your retirement plan.
Ready to learn more? Let’s make your financial goals a reality.
