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How SPOUSAL RRSPs Work

Written by FrugalTrader on Feb 21, 2007 filed under Retirement

Good morning! I received some reader mail and I’ve been asked to write about spousal RRSP’s. Here it goes..

What is a Spousal RRSP?

A spousal RRSP is where one spouse makes an RRSP contribution but the other spouse owns the plan.

Why would a married couple contribute to a spousal RRSP?

Not all married couples should use a spousal RRSP. This only makes senses if one spouse makes significantly more income than the other.
It provides a means of income splitting. Here in Canada, legit ways to income split are not easy to come by.
The reason for incoming splitting is so that during retirement, both spouses will have approximately the same income thus reducing income tax.

How does it work?

In a spousal RRSP, the higher income spouse will contribute to the plan. The higher income spouse can then claim the tax deduction.
For all intents and purposes, the money within the spousal RRSP now belongs to the lower income spouse.
The main caveat being that the lower income spouse cannot withdraw from the plan until 2 calendar years (Jan 1-Dec 31) after the last contribution. Otherwise, the withdrawal will be taxed in the hands of the contributer.

Personally, we don’t use spousal RRSPs because my wife and I both have approximately the same salary. However, if we decide that it would make sense for my wife to become a stay at home Mom, then you can be assured that we will use this strategy.

40 Comments, Comment or Ping

1. Steve

In regards to your statement: “This only makes senses if one spouse makes significantly more income than the other”.

It is important to note that this should not be interpreted as: “You should have a spousal RRSP if one spouse makes significantly more income than the other.”

There are cases where even in this circumstance it does not make sense to have a spousal RRSP. The key point to keep in mind is that you are using up your allowable contribution room in your RRSP when you contribute to your spouses. (If I am wrong on this let me know, but I have been told this by 2 sources.)

If you have a case where your spouse makes less money than you but neither of you has a pension, a spousal RRSP makes no difference.

Similarly if you make more than your spouse but he/she has a pension. A spousal RRSP will actually be worse.

If you make more money than your spouse, you have a pension, but your spouse doesn’t. It definitely makes sense to contribute to a spousal RRSP.

But I think the government was going to allow income splitting for retirees. In which case it makes the whole point of spousal RRSPs moot, unless you and your spouse plan on retiring early.

Feb 21st, 2007 @ 8:57 am
2. FrugalTrader

Steve: Thanks for the analysis! I should have been more clear in my article. I assumed that spousal RRSP’s worked best for stay at home spouses (ie. very low income).

Feb 21st, 2007 @ 10:02 am
3. Jeff Mackey

Current income may not be as big of a factor as anticipated retirement income. Maybe one spouse is anticipating a company pension than the other. Spousal RRSP contributions can make sense in this situation if incomes are equal.

Feb 21st, 2007 @ 10:03 am
4. Mike

Steve - you are right - contributions to a spousal account use up the contribution room of the person making the contribution.

With income splitting it’s pretty debatable if these accounts are worthwhile anymore. Even if you are planning early retirement and one account is bigger than the other - if there is enough $$ in the smaller account to support equal withdrawals until age 65 than you don’t need the spousal.

Having said that, if you already have one (as I do) then it does no harm to continue contributing to it.

Feb 21st, 2007 @ 12:36 pm
5. Mark

Stay at home strategy:

(1) high-income spouse pours money into spousal RRSP
(2) wait 2 years
(3) low-income spouse takes the money out as income uses it to pay household expenses

Feb 21st, 2007 @ 4:36 pm
6. Mike

Mark - don’t forget you would give up the spousal/dependant credit if you create income for the stay-at-home spouse. In our case it’s about $1800 for last year.

Feb 21st, 2007 @ 6:56 pm
7. Traciatim

Maybe I missed something, but didn’t the recent budget changes make it so that retirees can split income anyway? Doesn’t that make this strategy much less valid now?

Feb 22nd, 2007 @ 10:04 am
8. FrugalTrader

Traciatim: Current income splitting for retirees is for pensions ONLY, not RRSP yet.

Feb 22nd, 2007 @ 10:43 am
9. Qubikal

Mark: Can you explain why step (3) of Stay at home strategy is for the lower income spouse to pay for household expenses?

Normally, you would want the lower income spouse to invest the money and have the higher income spouse to pay for the expenses. The thought is that the investment income would be then taxed at a much lower rate. (assumes that you’re not employing the Smith Maneuver)

Feb 22nd, 2007 @ 11:23 am
10. Magnum

It was stated that the spouse can’t withdrawl for 2 years. Is the HBP exampt from that provision? Would a 90 day withdrawl be possible?

Feb 22nd, 2007 @ 3:13 pm
11. Mike

Magnum - the spouse can withdraw within 2 years but then it’s taxable in the hands of the contributor - not her.
HBP funds have to be in the rrsp for at least 90 days.

Feb 22nd, 2007 @ 10:30 pm
12. Jack

Another consideration that I didn’t see mentioned for contributing to a spousal RRSP is to balance out the RRSP holdings of each spouse. In our case, I had started working and contributing to my RRSP before my wife did (I’m 4 years older and a little more financial savvy) and have ~5x the RRSP holdings that she has. So our spousal plan is to balance out our repsective RRSP holdings faster. I also earn a higher income right now and she will be going on mat leave in a few months, so this way I can continue to contribute to her RRSP while she is not working and earning little income.

Feb 26th, 2007 @ 4:59 pm
13. Mark

I wasn’t thinking of retirees - I was thinking of my own situation: I work, though not making much, and my wife is a stay-at-home mom with no income.

Mike: is there an income threshold for the spousal/dependant credit?

Qubikal: Yes - that would be better, assuming you can pump enough money though the RRSP

Feb 27th, 2007 @ 9:42 am
14. Mike

I don’t know if there is a threshold for the spousal credit.
I make around 100k and I got about $1800 last year from it.

Feb 27th, 2007 @ 12:21 pm
15. bakeappled

FrugalTrader -

Just to clarify how the current income splitting for retirees:

Eligible pension income

For individuals aged 65 years and over, the major types of qualifying income that can be allocated to a spouse or common law partner are:
* a pension from a registered pension plan (RPP) ;
* income from a registered retirement savings plan (RRSP) annuity; and
* payments out of or under a registered retirement income fund.
For individuals under 65 years of age, the major type of qualifying income that can be allocated to a spouse or common law partner is income from a pension from a registered pension plan.

Apr 19th, 2007 @ 1:20 pm
16. bakeappled

Even with unlimited retirement income splitting, a case where a spousal RRSP can still be worthwhile is when there is an age gap.

An older spouse who can no longer contribute to their own plan can still contibute to a spousal plan if they have contribution room. The more tilted the nest egg is towards the older spouse, the bigger the saving will be. The older spouse will reduce their tax bill, legally transfer assets to spouse, and defer tax (even better if the younger spouse will have a lower tax rate).

Apr 19th, 2007 @ 1:40 pm
17. SavingsJourney

Retirement splitting or not, spousal RRSP contributions should be done today where possible. My marginal tax rate is about 46%, my wife’s is about 32%. Even if the government does offer splitting in the future of RRSP’s during retirement, this is a no-brainer today where possible.

May 23rd, 2007 @ 8:52 am
18. sam

the main advantage of RRSP is tax deffered growth..more years your funds stay in RRSP,greater the benefit..but once you complete 69 years(i think it’s being changed to 71)..you have no choice but to make withdrawals..
so if your spouse is younger than..she is going to turn 69 a few years after you..so the funds can remain in RRSP for those extra years…..one more advantage of spousal RRSP

May 25th, 2007 @ 10:41 pm
19. Ed Rempel

FT - The key with spousal RRSP’s is to try to income split after you retire. The goal is to have similar taxable incomes after you retire. Consider any pensions, how much CPP each would likely get, investment and any other income either of you may have, and how much you each have in RRSP’s and try to even your incomes.

If your incomes are similar, neither of you has a pension and you are paying similar amounts into CPP, then generally you should try to keep your total RRSP’s about equal. If one spouse has noticeably less in RRSP, then you can get them closer with a spousal RRSP.

This is a separate decision from which one should make an RRSP contribution, which is based on your incomes and tax brackets today.

The retiree income splitting rules are new and may change in the future and don’t apply to all types of income. There is no disadvantage of using a spousal RRSP, so it is still generally smart to plan the same for equal retirement incomes.

Mark - Your strategy sounds good, but Mike is right that the spousal tax credit generally wipes out the advantage. It is a credit based on the lowest tax rate up to $7,500 of income (2006), which is almost the entire personal tax credit. Essentially, you or your spouse will pay 22% tax on any income she makes - including a withdrawal from a spousal RRSP if she has no other income.

Ed

May 26th, 2007 @ 11:28 pm
20. Mike

Ed: I keep hearing conflicting info on what type of income is eligible for splitting. I believe that payments from a RRIF are eligible for splitting but what about from an RRSP? I’ve heard yes and no in various media.

It’s not an overly important question since it’s no big deal converting part of an rrsp to a rrif but I’d like to know the facts!

May 27th, 2007 @ 12:27 am
24. TL

Hi FT, Thanks for posting this informative article I think it’ll be very helpful for my current and future situation.

That said, I have one question: When opening up a spousal RRSP account, would I open the account under my spouse’s name (assuming that I would be the one contributing to her account) or would it formally be under my name and would I have trading authority over her account?

Oct 22nd, 2007 @ 1:27 pm
25. FrugalTrader

TL, the application process really depends on your brokerage. In my eyes, if you pick spousal RRSP, the application process should be self explanatory. There should also be a section to name alternate trading authority.

Oct 22nd, 2007 @ 1:33 pm
29. jie

The “three-year rule” applies to spousal RRSPs regardless of when, or to which financial institution, contributions were paid.
However, this rule does not apply to withdrawals under the Home Buyers’ Plan (HBP) or the Lifelong Learning Plan (LLP).
source: http://www.dsf-dfs.com/en-CA/Prtclrs/CnsltCntrFrmtn/CntrRrRtrt/REER/RglsRR.htm#WithdrawalfromtheSpousalRRSP

Dec 4th, 2007 @ 6:50 pm
31. nobleea

I’m still not clear here. RRIFs qualify under the pension splitting in retirement. Am I to assume that spousal rrsps are now a little unneccesary? It’s just semantics and paperwork.

Feb 1st, 2008 @ 4:19 pm
32. Traciatim

You are correct nobleea, RRIF income can be split which diminishes the spousal RRSP contributions worth. However there may be other reasons to continue keeping the RRSPs value even between spouses, one of them being that we don’t know what the rules will be when we retire.

I asked a similar question over on Preet’s site wheredoesallmymoneygo.com . . . link below:

http://www.wheredoesallmymoneygo.com/ask-a-question/post/331424

Feb 1st, 2008 @ 5:14 pm
33. FrugalTrader

Nob, you are right. RRIF withdrawals qualify as pension income, so yes, spousal RRSP’s don’t serve much purpose in the case of traditional retirement. However, I believe the earliest you can open an RRIF is 55, so the spousal RRSP can work well for those who decide to retire early.

Feb 2nd, 2008 @ 8:50 pm
34. Peter McCarthy

under what circumstances should one do a spousal RRSP? I went to scotia on friday and they told me that i shouldn’t do this until i’m 40 or 50. I’m 30.

my wife makes about 40K less than me is that enough to take advantage of spousal RRSPs? What do you think

Feb 2nd, 2008 @ 9:03 pm
35. Ed Rempel

Hi all,

Spousal RRSPs can still be useful, since not nearly all income in retirement can be split.

The purpose of spousal RRSPs is to try to keep the taxable income or 2 spouses similar in retirement. Your higher income is only one factor, Peter. You should look at all factors and project what your retirment incomes are likely to be.

Consider your total RRSP’s vs your wife’s, how much pension income you may get from your jobs or the government, and any other income or investments either of you may have now or before you retire.

The Scotia person’s answer is simplistic and shows they don’t understand at all. Age is not really relevant, except that it is sometimes easier to project your retirement incomes when retirement gets closer.

Regular RRIF income and pensions can be split, but not most other income, including investment income, lump sum withdrawals from RRIFs or RRSPs, employment income or other retirement benefits. So, having some of your retirement income split does not necessarily mean your taxable incomes are effectively split.

As FT mentioned, the split only applies at age 65 and not to anyone that may retire early.

Because of these factors and because the rules may change again, we still consider it adviseable to use spousal RRSPs to plan to equalize our clients’ retirement taxable incomes.

If you both don’t have a pension or any other specific income you expect in retirement, and if you expect similar amounts for OAS & CPP, then it is relatively simple and you should try to keep the total RRSPs in each of your names at similar levels.

Ed

Feb 2nd, 2008 @ 11:54 pm
36. al

simply put :

income:
1-husaband 155,000 $
2-wife : no income

Sousal RRSP:
opened dec/2007 for 20,000 $

if, withdrawed on jan/2010

then how much can she withdraw (net) ?

thank you

Feb 15th, 2008 @ 2:13 pm
37. FrugalTrader

al, your wife can withdraw as much of the RRSP as she likes. The biggest question is WHEN she withdraws the funds relative to when the funds were first deposited. As indicated in the article, your wife can withdraw the funds 2 calendar years from deposit and the money will be taxed in her hands.

In your scenario, it “seems” like you may pass the test. However, I would double check with a tax professional to be sure.

Feb 15th, 2008 @ 7:34 pm
38. al

thank you FT for your rersponse,
so, if my wife withdraw 5000$$ jan/2 and another 4000 the very next day minus the refundable 10% withholding tax,
would this affect my spousal tax credit when i file for my tax then?
p.s if yes,based on the total income , how much would i lose ?

Feb 15th, 2008 @ 9:09 pm
39. FrugalTrader

Al, the RRSP withdrawal would be counted as income, so yes, it would reduce your spousal tax credit.

See these posts for more info:
http://www.milliondollarjourney.com/stay-at-home-with-the-kids-or-work.htm
http://www.milliondollarjourney.com/spousal-amount-uccb-and-cctb.htm

Feb 15th, 2008 @ 9:31 pm
40. Michael Wood

If you do the income split with low-income spouse, it seems to me to make sense to do the following:

ALL RRSP Contributions go to Spousal until it’s approx $35k (or double that, your choice).
…Wait 2 years
Pull $35k from Spouse (as income) year 1
Pull $35k from Spouse (as income) year 2

Rinse and repeat. Lather if necessary.

WHY $35k? This maxes the lowest marginal tax bracket for the high-income person, making their “effective taxes” 16% for that initial $70k, then a big jump of course for the subsequent dollars.

This is a heck of a lot better than a measly $1600 dependent claim.

Canada: The land of “Individual Taxation” when beneficial to Revenue Canada, and the land of “Family Taxation” for benefits to the family (GST Rebate etc). Expletives deleted.

Sep 11th, 2008 @ 4:21 am