Spousal RRSPs: still useful?

A spousal RRSP can be a tax-effective way for your family to save for retirement. The idea behind a spousal plan is to equalize family income during retirement, which can lead to big tax savings.

How it works

If you are married or have a common-law partner, you can contribute to a spousal RRSP for your partner and claim the tax deduction. However, your total contributions to your own plan and your partner’s can’t exceed your allowable maximum contribution.

Once contributed, the money in the spousal RRSP belongs to your partner. As long as spousal money isn’t withdrawn in the same year or next two years, it is treated (taxed) as your partner’s income when withdrawn.

Since spousal RRSPs let you put assets into your spouse's name and eventually have withdrawals taxed in their name, they can help equalize your incomes in retirement. That's a big step towards your family paying the least possible income tax in retirement.

Are there other ways to share income in retirement?

Yes. Pension Income Splitting was introduced to let you share up to 50% of eligible sources of retirement income (such as RRIF, or pension or annuity income) with your spouse. You can choose whether to split any income and, if so, how much to split, when you both file your taxes each year. Since these rules are so flexible, some people wonder if spousal RRSPs are still relevant.

Is a spousal plan right for you?

You get the same immediate tax benefit as contributing to your own RRSP as a spousal RRSP. And with the new pension income splitting rules, you can share up to 50% of your RRIF income with your spouse. So why bother with spousal RRSPs anymore?

There's at least 2 good reasons to still consider spousal RRSPs.

One is if you and your spouse plan to retire in different years. Be careful you don't find the working spouse has all the retirement assets, and the retiree nothing. Pension Income Splitting only lets you share income being received. If the working spouse is not yet drawing on retirement assets or income, they have nothing to allocate to the retired spouse. Building up an initial nest egg for the first retiree will help, and a spousal RRSP might fit as part of that.

Also, Pension Income Splitting rules may not go far enough to equalize and minimize your tax in retirement. You can only share up to 50% of eligible income, which leaves out non-registered income like dividends, interest and capital gains. If your and your spouse's incomes are substantially different in retirement (say because of a large inheritance), a spousal plan may help rebalance your retirement incomes.

How are spousal plans divided in a marital break-down?

Some people worry that spousal RRSPs are automatically kept by the spouse named as the account holder. Common-law couples should check with legal advisors on how assets, including spousal RRSPs, are divided in a relationship breakdown. But in divorce situations, spousal and regular RRSPs are generally considered family assets, and amounts accumulated while together are often divided. Whether married or living common-law, you can transfer RRSPs between former spouses without tax, if you have proper documentation.

To find out more about income splitting in retirement or spousal RRSPs, try our FAQs, contact us at 604.877.7000, visit your local branch, or in your neighborhood.


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