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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.

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 125 comments… add one }

  • bobby May 12, 2011, 12:32 pm

    Hi Ed,
    So you mean if i can contribute from now until Dec 31 2011 and than do not make any contribution in spousal RRSP till Jan 1 2015 than only i can able to withdraw any date in 2014 which will be taxed to my spouse.

    Please correct if i am wrong.

  • Ed Rempel May 13, 2011, 1:49 am

    Hi Bobby,

    Yes, you got it. That is correct. The only question is whether this is a good strategy.

    You might be thinking it is obvious to withdraw at a lower tax bracket, but you do lose the future tax-free compounding that you would get if you leave it in an RRSP. If you recontribute it, you are using up your RRSP contribution room.

    If this is one year that your wife will have no taxable income and you have tons of RRSP room that you will never use, then it clearly works for you.

    Just remember that the main benefit of RRSPs is the tax-free compounding over the years, so you usually should not do transactions ONLY for tax reasons (such as withdrawing from an RRSP just because your wife is in a slightly lower tax bracket than you.)

    Ed

  • bobby May 13, 2011, 11:29 am

    Hi Ed,
    My wife is not working since 2008. Only income she has is UCTB(Universal child tax benefit) and HBP(Home buyer plan) withdrawal which
    we are not putting back in RRSP.

    For Example,
    I)If i contribute in spousal RRSP in 2011(Amount = 10K) and i withdraw(Amount = 10K) in 2014 than it will be taxed under my spousal income for
    2014.If my income is 75K and she don’t have any income other than mentioned above(UCTB+HBP) how much money i can save(For Tax Year 2011) and how much
    tax she has to pay in 2014 ?

    II)if she don’t withdraw Amount = 10K in 2014 than how much tax she has to pay(after applying individual tax credit and all other calculations) ?

    Thanks a lot for your time and help in advance.

    Bobby

  • Ed Rempel May 13, 2011, 5:33 pm

    Hi Bobby,

    Your wife can earn $10,000 with essentially zero tax (and probably a bit more), but it still costs you money. You can claim a tax credit to claim her as en eligible dependent. The more she makes, the smaller your tax credit.

    The rate on the tax credit is the same as the lowest tax bracket – about 21%. So, for all practical purposes, she is in a 21% marginal tax bracket, not a 0% tax bracket.

    RRSP contributions when you are in the 21% bracket are obviously much less beneficial than for people in higher brackets, and depending on your retirement income, may have no benefit at all. TFSAs are better for people in lower tax brackets.

    When your wife works, what tax bracket is she in? If she earns less than $44,000/year, then she is always just in the 21% bracket, so she is in the same tax bracket.

    If you withdraw from your RRSP, what will you do with the money? If you spend it, then you will obviously be worse off in the future then if you kept it invested. If the purpose here is effective planning, not that you need the money, then I would suggest to only withdraw it if you would invest it somewhere else, such as in your RRSP, or a TFSA.

    Ed

  • bobby May 13, 2011, 6:18 pm

    Hi Ed,
    If I invest 10K in spousal RRSP on May 13 2011 and on Jan 1 2014 if SHE withdraw 11k(amount after appreciation) than she has to pay
    21% tax on 11k and i saved 33% tax on 10k for Year 2011.

    1)33%-21% = 12% tax saving for me(i am in higher tax bracket)
    The reason for doing this transaction is to save 12% tax. Again on Jan 1 2015 i will invest 10K in spousal RRSP and withdraw in
    Year 2018. What do you think ?

    Keep in mind that she is not working and she will not work for 10 more years.

    2)I couldn’t get your point of tax-free compounding over the years. Because whatever appreciation we get on initial investment
    we always have to pay tax.

    Please correct me if i am wrong in any of the above 2 statements and clarify it separately what is the best thing to do and how ?

  • Steve May 13, 2011, 7:49 pm

    I don’t get it. If someone makes $0 one year and withdraws about $10,000 from their spousal rrsp (assume no contributions in last 2 years). Shouldn’t the tax implication be ~0 since we don’t get taxed on roughly the first $10000 in income?

  • Ed Rempel May 14, 2011, 2:00 am

    Hi Bobby,

    Your strategy works, but the downside is that you are using up your RRSP contribution room. You may be doing this for a small tax gain, instead of focusing on very large, long term investment gains.

    You are doing all this to save about 10% in tax over 3 years. However, if you left the money in the spousal RRSP and invested it well, you could average 10%/year return on your investments (average stock market returns).

    At that rate, your investments would double about every 7 years, so in 20 years you would have 8 times your original investment. That is significant money – and far more than the 10% tax savings from your strategy.

    This may or may not apply in your case. It sounds like RRSPs are probably worthwhile for you. We find it is far more effective to focus on the big long term gains, rather than the small short term gains.

    Your assumptions are basically correct, except that it is you that would pay the 21%. You get a tax credit of about $10,000 for claiming your wife as a dependent, which would save you about $2,000/year of tax.

    Ed

  • Ed Rempel May 14, 2011, 2:02 am

    Hi Steve,

    If you are single, they you are correct. But if you are married, your spouse can claim a tax credit of about $10,000, which would save her a bit over $2,000 of tax.

    The tax credit is reduced for every dollar of taxable income you have, so if you withdraw $10,000 from your RRSP, then your spouse would not get this tax credit.

    Ed

  • Steve May 14, 2011, 9:34 am

    Hi Ed,

    I’m still a little fuzzy on this. Don’t we all pay tax according to the tax bracket we fall under regardless of marital status? Hence if my wife made no money and withdrew ~10000 from her spousal rrsp (I made no contributions in previous 2 years). Shouldn’t her tax payable be almost 0 since we all pay 0 tax on roughly the first $10000 of income?

  • Ed Rempel May 14, 2011, 11:54 pm

    Hi Steve,

    Yes, your wife would not pay any tax, but it would probably affect your tax return. Do you claim the spouse tax credit of up to $10,382 for your wife on your return? That tax credit on your return would be affected if she has taxable income.

    Ed

  • Steve May 15, 2011, 12:58 am

    Ed,

    Thanks for your reply. The light just turned on in my head now and I see what you are saying! I lose the tax credit I would have had had she not made any taxable income.

  • bobby May 17, 2011, 4:13 pm

    Hi Ed,
    Please correct me if i am wrong.

    If i invest in spousal RRSP at the end of December 2011 and withdraw in first week of January 2014 than it is only 2 years of
    investment and saving approximately $1400 in tax even if i loose tax credit of about $10,000 for claiming my wife as a dependent.

    I don’t mind using RRSP contribution room.

    Thanks,
    bobby

  • Alan November 21, 2011, 12:25 pm

    My common law spouse has unused RRSP contribution room of approximately $125,000.

    I am expecting a large sum of money and my unused RRSP contribution room is limited.

    Can I contribute to her RRSP and take the deduction against the income reported on my tax return?

  • LJ January 11, 2012, 10:34 am

    I am a stay at home mom, but also an occasional teacher. My income varies from a few thousand to $15,000 a year. My husband is making slightly over $90,000 a year. Does it make more sense for him to contribute to his own RRSP or open a spousal RRSP for me? Also, we used my RRSP to help with our first house downpayment, seven years ago. Should he help me pay it off, or should I just pay back the minimum each year?

  • KITZ February 27, 2012, 2:35 pm

    HELLO FOLKS
    looking for some suggestions plz, my wife is stayhome mom last 4 yrs,i made around 80k in 2011, i have plnty room for rrsp contribution limit.I also have a company pension plan.
    wud it make more sense putting money in my rrsp or shud i have her start her own rrsp.
    ANY SUGGESTIONS ARE WELCOME
    THNKS

  • Boo12345 April 25, 2012, 12:53 am

    Husband 130k, 13k allowance which is normally maxes each year
    Wife 55k, 34k tax allowance not used.
    Child care 14k

    What is the best option? Without spousal RRSP we are getting back $6200 each year so far.

  • yaric September 20, 2012, 5:31 pm

    Spouse RRSP is great tool. But can someone explained me how to repeat it?

    I placed 20K to SRRSP in 2009, fully withdrawn 2012.
    Now question, when I eligible to deposit money into new Spouse RRSP?

    – Anytime from now
    – After Jan 1 2013
    – After March 1 2013 (as 2013 RRSP deposit)

    I am not able to find answer anywhere.

    Thanks.

  • mojo December 4, 2012, 10:01 pm

    @Yaric — I think the answer is after jan 1 2013. According to attribution rules, if the withdrawl is made from a spousal rrsp within three years of “LAST” contribution, it will be attributed back to contributing spouse. Now if your spouse withdrew in 2012 and you make a contribution in 2012, the last year of contribution from CRA view becomes 2012 and you will get dinged with paying taxes on the withdrawl.. HTH.

  • TJ February 26, 2014, 5:52 pm

    Can you contribute to your Spouse without contributing to your own RRSP ?

    Eg :

    Spouse 1 : makes $ 60,000 , will make the same amt in future yrs too.

    Spouse 2 : makes $ 0 , is stay at home & has Zero income..will also not have income in future years & is ALMOST guaranteed to withdraw this Spousal RRSP made on his behalf after the 2 CALENDAR yrs.

    RRSP Deduction limit for Spouse 1 is $ 8,000 .

    Can Spouse 1 do a spousal RRSP for $ 8,000 without contributing anything to his/her own RRSP ?

    Will they allow that ?

    Because Spouse 2 is going to withdraw it after 2 Calendar yrs & will also have Zero income then ..but Spouse 1 is still going to make $ 60,000 – 2 years from now

  • ana March 5, 2015, 3:59 pm

    Hi all,

    Question:
    Husband contributes spousal rrsp Feb 28 2012 for 2011 tax year $10000. 3 year attribution end Jan 1 2015, then contribute 15000$ Feb 28 2015 for 2014 tax year.
    Do I need to wait until Jan 1 2017 to withdraw 10000$ so its tax on me instead of him? Or can i withdraw this year and be tax on me. I am confused about the attribution rules.

  • Ed Rempel March 5, 2015, 9:03 pm

    Hi TJ,

    Yes. You can contribute to whichever RRSP you want.

    Ed

  • Ed Rempel March 5, 2015, 9:13 pm

    Hi Ana,

    In your example, you would have to wait until Jan.1/18 to withdraw and have it taxed to you. The date of contribution is the relevant factor. The year you deduct it is not relevant.

    If you want to withdraw in 2017, your husband would have had to contribute by December 2014.

    Ed

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