What you should know about spousal RRSPs

A spousal Registered Retirement Savings Plan (RRSP) is a way for couples to split their retirement savings with the goal of evening out their savings. 

While this savings vehicle is available to both spouses and common-law partners in Canada, often people aren’t aware of the advantages of Spousal RRSPs—and may potentially end up paying more taxes than they need to in their retirement years.

Here's everything you need to know about spousal RRSPs.

A spousal RRSP is one type of retirement savings plan (RSP). It's an investment plan in which you can purchase investment products, such as mutual funds, guaranteed investment certificates (GICs) and stocks. Using a spousal RRSP is an effective way to save for retirement and your contributions are tax deductible. Money earned in your plan grows tax-deferred until you retire, which can accelerate the growth of your savings.

With a spousal RRSP, one partner is the owner of the account, while the other partner is the contributor, which is typically the higher income spouse.  The amount a person can contribute to a spousal RRSP depends on the contributors' overall RRSP limit; only the contributing partner will receive a tax deduction once they’ve made a spousal RRSP contribution. Your total contribution room available applies to both personal and spousal RRSPs (as well as any other RRSP you are contributing to like a group RSP). For example, if your limit is $10,000, you could contribute $8,000 to your individual RRSP and $2,000 to your spousal RRSP.   

It’s important to note that only one spouse (the owner) is the legal owner of the money within the spousal RRSP. 

Yes, you can. It is important you take into consideration all of your contributions to make sure you do not go over your annual contribution limit. 

Many couples might not consider a spousal RRSP when they each have their own RRSP. But once you understand the benefits, you'll see why setting one up may be worth your while.

• Immediate tax break. For every dollar you contribute to your personal or spousal RRSP, your taxable income for the year is reduced by an equal amount. This is ideal for high income earners as it allows them to reduce their taxable income.
• Potential tax break later. The long-term goal of investing in a spousal RRSP is to minimize taxes for a couple during retirement by putting retirement income in the hands of the lower-income spouse.

By opening a spousal RRSP, you're essentially income splitting when you eventually draw down on these funds in your retirement years. The spousal RRSP allows the higher income earner to move their savings into their spouse's hands with a lower income. Then, when both partners retire, their incomes will be closer together, which may reduce the taxes owed. If they left things completely separate, the higher income earner may end up in a high tax bracket even in retirement.

Setting up a spousal RRSP is ideal for couples who expect a significant difference in their retirement income. From a tax perspective, it's more advantageous to have two people in a lower tax bracket than one in a high tax bracket.

The Canada Revenue Agency states that any spousal RRSP contributions cannot be withdrawn for three calendar years from when the contribution was made without there being tax implications for both contributor as well as the spouse or the partner

For example, if you contributed to your spousal RRSP in 2019, your spouse or partner wouldn’t be able to withdraw that money in 2019, 2020, or 2021 without tax implications. If your spouse or partner does need to withdraw any of the funds in 2019, 2020, or 2021, the money up to the contributed amount is added back as income to the contributor, and they will be taxed on it. The remainder, if applicable, would be taxable to the spouse.

The three-year rule will not apply if either spouse dies, or if you or your spouse are non-residents or separated due to the breakdown of your relationship at the time of the withdrawal.

Generally speaking, spousal RRSPs can be opened at a financial institution through one of the following methods:

• In person. If you visit a bank branch, the on-site staff will assist you. It's best to book an appointment in advance to ensure an appropriate amount of time is dedicated to you.
• By phone. A financial advisor or service representative will be able to open your account over the phone with you.
• Online. Some financial institutions will allow you to set up a spousal RRSP online at your own convenience.

Note: At Scotiabank, to open a spousal RRSP, we need to speak to both the contributor and owner to authenticate the account. First the bank will speak to the contributor to authenticate and confirm the contribution amount and where the funds are coming from. We would then speak to the plan owner to authenticate the account and then discussing the investment options.

Whichever method you use to open a spousal RRSP, you'll need to provide essential information for both the spouse and contributor to set up your account.

Regardless of the contributor's age, spousal RRSP contributions can continue to be made until the plan owner turns 71. At that time, the spousal RRSP must be collapsed and transferred into a Registered Retirement Income Fund (RRIF).

The year after establishing your RRIF, you must start withdrawing the annual minimum payment (AMP) from the RRIF.  The Canada Revenue Agency (CRA) sets the AMP which increases as you get older. It's possible to withdraw from your spousal RRSP earlier. If you do, this withdrawal will have withholding tax applied at the time of the withdrawal. Additionally, you will need to report the withdrawal on your annual tax return and potentially you may need to pay an additional amount of tax depending on your annual income.