How to use a spousal RRSP

There is nothing sexier than an RRSP, at least for those who know how to use it.

As you probably already know, a Registered Retirement Savings Plan (RRSP) is a type of account into which you can invest tax-sheltered money for your retirement. Generally, you can save 18% of your income from the previous year with a contribution limit announced at $27,230 for 2020.

What few people know, however, is that you can also use the RRSP to pay even less tax by transferring part of your taxable income to a spouse with a lower taxable income. To implement this strategy, you must use a spousal RRSP. It allows one of the partners to contribute to the other’s plan while taking advantage of the corresponding tax deduction. This will be on behalf of your partner and they will control it. As with a traditional RRSP, you can invest up to your contribution limit without affecting your partner’s limit.

Whether you’re married or in a common-law relationship, using a spousal RRSP can provide you with many financial benefits.

Income splitting

A big salary provides a big retirement but also involves higher taxes. Using a spousal RRSP enables you to split your income and thus pay less tax during retirement. In fact, if instead of all the money being invested into a single RRSP, the money is allocated equally between two RRSPs, the couple will be subject to a lower tax rate upon retirement.

Take the example of Jessica and Roger.

Roger earns $100,000 and his wife Jessica earns $50,000.

Having read an article about spousal RRSP accounts, Roger decides to open such an account by naming Jessica as the beneficiary.

Instead of investing $18,000 this year into his RRSP account, he will contribute $13,500 to his RRSP and $4500 to the spousal RRSP opened in Jessica’s name.

Jessica, for her part, will maximize her own RRSPs by injecting $9000 into them.

The advantage of this strategy is that upon withdrawal, the $4500 that Roger injected into the spousal RRSP will be added to Jessica’s taxable income, not his. However, with an annual salary of $100,000 per year, he expects to have a higher retirement income than Jessica.

In short, Jessica and Roger will pay less tax on their withdrawals once they retire.

Contribute after age 71

A spousal RRSP also extends the contribution period. The age limit for a regular RRSP is currently 71, but with a spousal RRSP, you are allowed to invest until your partner has reached the contribution age limit. So, if you have a younger partner, you will be able to continue making tax-deductible contributions.

Buying a first home

You can also take advantage of a spousal RRSP if you’re planning to acquire a first home. If your spouse is not contributing to an RRSP, opening a spousal RRSP in their name will allow you to double the down payment. Under the HBP (Home Buyers’ Plan), a person can borrow up to $35,000 from their RRSP to purchase their first home and will have 15 years to return this amount to their RRSP account, at no cost. With a spousal RRSP, each partner can withdraw up to $35,000, doubling the amount that could be used to buy a first home.

However, a spousal RRSP also has its drawbacks.

Beware of separation

During an interview with Charles Hunter-Villeneuve, financial planner and author of the comic book Lire et Tirelire, he presented us with one of the main problems linked to the use of a spousal RRSP. If you’re a common-law partner and have separated, you won’t be able to get back the money you’ve invested into the spousal RRSP. Your contribution to the spousal RRSP will then be considered a donation. With the separation rate in Canada currently on the rise, investing in a spousal RRSP can be a risky bet. A possible solution would then be to establish a cohabitation agreement or to get married.

Respect the 2-year rule or 3 December 31sts

When you invest in a spousal RRSP, it takes two years before your spouse can withdraw the money invested to benefit from the tax advantage obtained through the strategy. Within the first two years, if your partner withdraws money that you yourself invested into the spousal RRSP, that money will be subject to your tax rate and not that of your spouse.

If you decide to opt for a spousal RRSP, don’t hesitate to consult our comparison tools for online brokers and robo-advisors, most of which offer RRSP accounts. You can also consult this article to choose between RRSPs, TFSAs and RESPs.