Families, RRSP

Spousal RRSPs: Contribution Limits & Withdrawal Rules in Canada

With a regular RRSP, you contribute to a plan registered in your own name and you control the investment. If you have a spouse or common-law partner, you would normally choose that person as your beneficiary. If you pass away before they do, the money from your RRSP will then be transferred into a registered account in your spouse’s name.

Summary: In a spousal RRSP, the plan is registered in your spouse’s name and controlled by her or him. As for all tax situations, the rules apply equally to common-law partners and married couples of either or the same sex. Here are the important things for spousal RRSP’s you need to consider:

How much can I put into a spousal RRSP?

The amount that you can invest into an RRSP during any given year is called your contribution room or limit. It is indicated on your notice of assessment. Whether you contribute to your own RRSP, a spousal RRSP or both, you cannot put in more than that contribution limit. Your spouse’s contribution limit is not affected by a spousal RRSP.

What is the advantage of contributing to a spousal RRSP?

You get to deduct the amount you invested in the spousal RRSP. You cannot put money into your own RRSP after the end of the year in which you turn 71 but you can contribute to a spousal RRSP until the end of the year in which your spouse turns 71. If you’re in a higher tax bracket than your spouse at the time of the spousal RRSP, the spousal RRSP deduction will save you more tax than if your spouse had made the contribution.

Any other advantages to spousal RRSP contributions?

They allow for income balancing if you make more money than your spouse. In Canada, couples that have equal income basically receive double the tax deductions. Spousal RRSPs are a way for couples to split retirement income. The money you put into an RRSP is allowed to grow tax-deferred. That means you do not pay income tax on it until you take it out of the plan.

If only one spouse has a large amount of money in an RRSP, at retirement that will mean a high income and pay more income tax than if each spouse has the same amount divided between their RRSPs. Both spouses would then be in a lower tax bracket and pay income tax at the same lower marginal tax rate.

It may also be useful to build a nest egg for the first retiree if you will not be retiring at the same time. Current pension income splitting rules have somewhat diminished the need to use spousal RRSPs to achieve a tax benefit but individual circumstances may still maintain some benefit besides the fact that the income splitting effect is established at the time of contribution and not at the time of withdrawal; thus not subject to changes in tax rules.

Should earning more income always be the deciding factor?

The spouse who earns more income will likely receive more income in retirement. However, the following factors should also be taken into account:

  • Having a pension plan
  • Receiving an inheritance
  • The actual amount in the RRSPs
  • Taking time off regular employment
  • Significant income after retirement from investments
  • Rental properties or other non-pension sources will have an impact on the money available then and should be taken into account

Note that you cannot transfer money between your RRSP and your spouse’s RRSP. You should review your situation regularly.

Can my spouse withdraw the money anytime?

A spousal RRSP is designed for retirement. At that time, it will be converted into a RRIF or an annuity and the income will be taxed in your spouse’s name at his or her tax rate. However, if your spouse withdraws funds within 3 calendar years of your contribution, that amount will be added to your taxable income in the year of the withdrawal.

Are there any exceptions?

Yes! First-time home buyers and people taking post-secondary education can take money out of a spousal RRSP. The spouse has to pay back the amount(s) but there is no penalty if the required repayments are made. Finally, using one spouse’s RRSP and the other spouse’s spousal RRSP for the Home Buyers’ Plan doubles the $35,000 maximum withdrawal.