How SPOUSAL RRSPs Work
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 for 2 calendar years (Jan 1-Dec 31) after the last contribution (up to 3 calendar years depending on when you open the account). Otherwise, the withdrawal will be taxed in the hands of the contributor.
- For example, if I contributed $10,000 into a spousal RRSP in May 1, 2011, then my wife can withdraw the $10,000 on Jan 1, 2014 and be taxed in her hands. To reduce the overall wait time, I could contribute to the spousal RRSP on Dec 31, 2011, and withdraw on Jan 1, 2014 bringing the total wait time of 2 years.
Where can I open an account?
Most discount brokerages will have an option for a spousal RRSP. Here is our discount brokerage comparison. Note that our readers have voted Questrade as their favorite brokerage which is where we have opened our most recent RRSP trading account. You can read our full Questrade Review here.
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.