Spousal RRSP's are still a good financial planning tool

Families in which one spouse has a little or no independent income may find that using a spousal RRSP remains a helpful way to split income. The ultimate goal of spousal RRSP’s is to equalize taxable income in retirement. A couple with the same amount of retirement income will pay less income tax.

A spousal RRSP enables the higher earning spouse to contribute funds to a spousal RRSP in the name of the lower income earning spouse. The contributing spouse receives the RRSP income tax deduction on his or her income tax return. When the lower earning spouse eventually withdraws the RRSP or income from an annuity or RRIF (Registered Retirement Income Fund) the amount withdrawn is taxed in that spouse’s hands.

The contributing spouse can contribute up to their own personal limit as determined by CCRA on the annual income tax assessment.

Attribution rules must be understood when using spousal RRSP’s as a financial planning tool. A spousal RRSP withdrawn within the year of contribution or the two preceding years is taxed back to the contribution spouse. The timing of withdrawals from a spousal RRSP is critical as you want to benefit from paying income tax on the amount withdrawn at the lowest possible income tax rate.

Spousal RRSP’s allow a spouse over the age of 71 to contribute to a spousal RRSP and claim the deduction , providing the contributing spouse still has contribution room and the other spouse is 71 years or younger.

By the end of the year in which you turn 71 you must convert your RRSP to a RRIF, which is the payout mode of an RRSP. If there has been a spousal RRSP contribution within the previous 3 year including the year of contribution, the RRIF income must be at the “minimum” amount until the attribution rules are met.

Spousal RRSP’s are a useful tool in retirement planning as long as couples understand the rules. Speak to your financial planner to learn more about Spousal RRSP’s.