Families, Savings & Investments, Tips & Advice

Love, With Benefits: The Ins and Outs of Spousal RRSP Benefits

You don’t have to have Cupid’s arrow hit you right between the eyes to realize that there are all kinds of advantages to being one half of a couple. And some of those advantages are tax-related.

Take the spousal RRSP, for example. (Although it’s called a spousal RRSP, you don’t have to be married to use one; a common-law partner is considered to be a spouse, too.)

How a Spousal RRSP Works

A spousal RRSP is an Registered Retirement Savings Plan set up in your spouse’s name which she or he controls.

You can contribute to your own RRSP, your spouse’s RRSP or both in any given tax year. When you contribute to a spousal RRSP, you get the tax deduction, even though the money goes into your spouse’s RRSP account.

Catches

  • Even though a spousal RRSP is separate from your own RRSP, your contributions to the spousal RRSP count as part of your contribution limit.
  • You can’t transfer money between your RRSP and your spouse’s RRSP.
  • If you withdraw money from a spousal RRSP less than three calendar years after it’s been contributed, the funds are taxed back as income to the spouse who contributed them.

But Spousal RRSPs Can Be a Beautiful Thing…

The most often touted benefit of the spousal RRSP is that it allows you to split your retirement income.

Because RRSPs become income when you retire, if one spouse has a lot more money in their RRSP than the other, the spouse with the higher income will end up paying a lot more income tax than he might otherwise pay if the couple had used a spousal RRSP to balance the amounts in their RRSP portfolios. And depending on the amounts involved, using a spousal RRSP could even put one or both partners into lower tax brackets, giving them even more tax savings.

But a spousal RRSP can also be a big help in getting the money together to buy a house.

Under the Home Buyer’s Plan, you can use up to $25,000 from your RRSP – and you and your spouse are both eligible. So if you still have the contribution room left after you’ve saved enough in your own RRSP, you can contribute to your spouse’s RRSP, doubling your Home Buyer’s Plan withdrawal.

Can’t contribute to your own RRSP because of age?

Once you turn 71, you are no longer allowed to contribute to your own RRSP. But if your spouse is younger than you are, you can still contribute to her spousal RRSP and get a tax deduction on your income tax. You can continue to contribute to your spouse’s RRSP until the end of the year in which she turns 71.

Young, middle-aged, retired or about to be – spousal RRSPs are always a good idea. But if you want to contribute to one this year, the time is now; the RRSP deadline for tax year 2013 is March 3rd.