Considerations for Using a Spousal RRSP
For a number of years the government has given taxpayers the ability to split certain pension income with their spouse when filing their tax returns. Taxpayers can also contact Service Canada and ask them to split their monthly Canada Pension Plan payments. As a result, many people wonder if there are still advantages of contributing to a spousal Registered Retirement Savings Plan (RRSP). Let us look at some reasons why spousal RRSPs still do make sense.
To refresh your memory, spousal RRSPs were originally designed to allow the high-earning individuals to contribute to their spouse’s RRSP but claim the deduction themselves. When it comes time to withdraw the funds from the RRSP, the money will be taxed in the hands of the spouse. However, there is one key item of note. The last contribution must remain in the plan for at least two calendar years after the year in which it was deposited.
Here are some reasons a spousal RRSP may make sense for you:
- Greater immediate tax savings. Let us assume that the higher earning spouse is in the 50% tax bracket and the lower earning spouse is in the 30% bracket. If the lower earning spouse contributed $1,000 to their own RRSP, they would only realize tax savings of $300. Conversely, a spousal RRSP contribution by the higher earning spouse of $1,000 would save $500 in taxes, an increase of $200.
- Your goal is to retire before the age of 65. The pensions splitting rules do not allow you to split RRSP income before the age of 65. Therefore, if you take money out of your RRSP before the age of 65 you cannot move half of it to your spouse’s tax return. Taking money out of a spousal RRSP ensures the income is taxed 100% in the hands of your spouse. The same principle applies if you expect that one spouse will have significantly more income from non-pension sources during retirement. (Remember the waiting period rule above.)
- One spouse is older than 71. The year after you turn 71, you can no longer contribute to your RRSP. However if you have a younger spouse, you can contribute to their RRSP as long as you have the contribution room. This could produce significant tax savings, and depending on your situation, the avoidance of having to pay back your Old Age Security.
- You are saving to purchase your first home. Under the Home Buyer’s plan, a first-time buyer can withdraw up to $25,000 from their RRSP to aid in the purchase. A spousal RRSP can allow access to a second $25,000. This is the case even if one spouse does not work outside the home.
- You know the lower earning spouse’s income will decrease. Perhaps there is the consideration of having a family, or returning to school, or starting a business that will not be profitable in the early years. Perhaps one spouse is planning to retire earlier than the other does. These are all good reasons for the higher earning spouse to contribute to a spousal RRSP that can then be withdrawn and taxed at a lower rate when the time comes. (Again, remember the waiting period rule above.)
- Contributions after Death. No contributions can be made to a deceased individual’s RRSP after the date of death. However, the deceased individual’s legal representative can contribute to a spousal RRSP in the year of death or during the first 60 days after the end of that year.
For more information on using a spousal RRSP, contact a DJB Tax Professional.