A Spousal RRSP is a Registered Retirement Savings Plan that allows you to make yearly contributions to a savings account for the retirement benefit of your spouse or common law partner. Spousal RRSPs are different from personal RRSPs in that you are making contributions to a plan that is owned by your spouse.
One of the keys here is who is making the contribution and who owns the account. We find it interesting that Spousal RRSP’s are one of the toughest investment vehicles for people to understand. If you start with thinking about this in terms of how to maximize your income tax savings both now and in the future, that helps with the context and reason for setting up a Spousal RRSP.
How do Spousal RRSPs Work?
With a Spousal Registered Retirement Savings Plan, you contribute money, up to your yearly contribution limit, to a plan owned by your spouse. As the contributor, you receive the tax deduction which is particularly beneficial if there is a large gap in your income levels. The spouse with the higher annual income receives a tax deduction at the end of the year, lowering their tax bill.
Conversely, the partner with the lower income level should be taxed at a lower marginal rate when withdrawing money from the RRSP, which should mean paying less tax on your RRSP assets at retirement.
We have found from a planning perspective that as each person’s situation changes, from an income and growth of your investments point of view, we have changed who the contributor is and whose name the money grows in. It’s always a good idea to ask a Financial Advisor who specializes in retirement income planning if a Spousal RRSP would work in your situation.
What is the contribution limit for a Spousal RRSP?
The contribution limit for 2020 is set at 19% of your individual earned income for 2019, up to a maximum of $27 230.00. You may also add any unused contribution amounts that have been carried forward from previous years. Your contributions to a spousal RRSP do not affect your spouse’s contribution limits.
What’s the benefit of using a Spousal RRSP?
The biggest benefit you’ll receive from a spousal RRSP is from income splitting. When you retire, you’re able to reduce your family’s tax bill by more evenly splitting your sources of retirement income.
There is also an immediate tax impact. You can reduce your income tax bill by contributing to a spousal RRSP. The higher income earner will receive a deduction when contributing money to the spousal RRSP, and withdrawals from the plan will be taxed based on the lower earning partner’s marginal tax rate.
Can a personal RRSP be transferred to a spousal RRSP?
The answer is no. You can only transfer funds between RRSPs owned by the same beneficiary. You can’t transfer funds from your personal RRSP, from which you benefit, into the spousal RRSP from which your spouse benefits, even if you are the only one making the contributions.
When can I withdraw money from a spousal RRSP?
You can withdraw funds from a spousal RRSP at any time. Remember that your withdrawal will be taxed as income in the year of the withdrawal. Withdrawals made within 3 years of a contribution will be added to the taxable income of the contributor for the year of the withdrawal.
The RRSP contribution deadline for 2020 is March 1st 2021.
Want to learn more about how a spousal RRSP could help in your situation? Get in touch with us here.
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