Registered Retirement Savings Plans, a.k.a. RRSP’s, are an excellent tool for retirement planning. The concept is fairly straightforward. Invest some cash, get a tax deduction for the investment on your tax return, let the funds grow tax free, and then draw them out when you retire. But what if your spouse earns substantially more or less than you do? How can you, as a couple, maximize your retirement benefits and minimize your tax payable? The good news is you have an option at your disposal– spousal RRSP contributions. Let’s walk through spousal RRSP’s with our couple Doreen and Leonard.
Leonard and Doreen have been married for more than twenty years and have big plans for their retirement. Leonard, aged 54, has steadily contributed the maximum amount of RRSP’s he’s allowed since he started working, both to plan for their golden years and to lower his annual tax bill. Doreen, aged 46, has worked outside the home off and on for years but spent most of her thirties running the household and raising their three children. Although her contribution to the household is priceless, her RRSP contributions are minimal. As it stands today, Leonard is set to receive significantly higher retirement payouts from RRSP’s than Doreen will. His CPP benefits will also be higher. In a perfect tax scenario, both spouses would enter retirement at the same time, with the same level of income. This rarely occurs but Leonard and Doreen can take a step toward it with spousal RRSP’s.
Leonard’s RRSP contribution limit for 2015 is $12,000. He can contribute this amount without penalty. He can choose to contribute all of the $12,000 to his RRSP, or to Doreen’s, or a combination of both. This year he has decided to contribute to only Doreen’s (she has lots of contribution room from previous years). Leonard’s contribution to Doreen’s RRSP not only adds to her retirement income, it also yields a deduction for the 2015 tax year – on HIS return. Yes, that’s right – Leonard claims the deduction on his tax return, same as if he had contributed to his own RRSP.
Skip ahead another decade or two. Leonard and Doreen have both retired and are living it up. Their careful planning has allowed them to retire quite comfortably. Because they focused on raising Doreen’s retirement fund for the last number of years, Doreen’s annual income is now much closer to Leonard’s. If Leonard had kept contributing only to his RRSP account, his retirement income would have been high enough to put him into a bigger tax bracket – which equals more tax payable. Even with pension splitting, Leonard and Doreen’s decision years ago to top up her RRSP contributions has led to a lower rate of tax overall for the couple.
Other Factors to Consider
Spousal RRSP contributions do have a few extra rules and benefits. Usually, a taxpayer can only contribute to RRSP’s until the age of 71. Not the case with spousal contributions. As long as Leonard has contribution room left, he can keep contributing to Doreen’s RRSP until Doreen turns 71.
Contributions to spouse’s RRSP also have special rules for early withdrawals. If Doreen decides to withdraw that 2015 contribution of $12,000 within three years of the date it was contributed, the full $12,000 will have to be declared as income on Leonard’s tax return. If she waits more than three years, it will be declared as income on her return. Some exceptions apply to this rule such as a breakdown in the marriage.
With careful planning and an eye on the “big picture”, you can maximize your RRSP contributions both before and during your retirement. To see how your RRSP contributions will affect your tax return this year, check out TurboTax’s Income Tax Refund Calculator.