Can I Contribute to My Spouse’s RRSP?

The question for many couples when it comes to retirement planning is, "Can I contribute to my spouse's RRSP?" Well, the answer is yes, and with the right strategic moves, you will enjoy even more benefits. Here at Canadian LIC – The Best Insurance Brokerage, we deal day-in and day-out with many clients who are out to make the most of their retirement savings. One of the most common recommendations is to make contributions to a spousal RRSP. This is not only a great way to build up a nest egg; it also creates some tax-saving opportunities.

The challenges of retirement planning seem to be typical for many of our clients. One couple, whose potential was a classic case, were concerned their retirements would be insufficient because one spouse had to take time off from work to care for the children, and thus, the other spouse needed to be the sole provider. They were concerned about how irregular incomes would impact retirement and wondered if there was a way of evening things out. This is where spousal RRSP contributions come into play.

What Is a Spousal RRSP?

A Spousal RRSP allows one spouse to contribute to the RRSP account of their partner. It becomes particularly helpful when spouses differ in salaries, letting the higher-income spouse take a tax deduction for the contributions they make toward the spousal RRSP. The retirement savings grow tax-free until withdrawal.

In our client's situation, this spousal RRSP provides an offset to their retirement savings balances and maximizes the after-tax value of a Canadian Retirement Savings Plan. This strategy could be applied to many couples experiencing similar financial circumstances.

How Do Spousal RRSP Contributions Work?

Let's demonstrate how this works in practice with the concept of spousal RRSPs. If the higher-income earning spouse makes the contribution into a spousal RRSP for the lower-income earning spouse, the contributor may claim the deduction on his or her income tax return. It should be noted that the limit for such contribution is based upon the available RRSP contribution room of the contributing spouse, not the lower-income spouse.

Here is an example:

One such client, earning $100,000 a year, had filled his own RRSP to the maximum yet still had contribution room. His wife, meanwhile, was working part-time and so hadn't contributed nearly as much to her own RRSP. By making a spousal RRSP contribution for his wife, he was able to take the deduction on his tax return and boost their combined retirement savings.

This works because it serves to equalize the retirement income between both spouses. In retirement, this lower-income spouse can draw from the spousal RRSP, likely at a much lower tax rate than the higher-income spouse would have been taxed, thereby saving the couple quite a bit in taxes over the years.

The Tax Advantages of Contributing to a Spousal RRSP

At Canadian LIC, from time to time, we explain the RRSP Quotes to our clients and how making a spousal RRSP contribution will help save taxes. Probably the most important benefit that the couple avails themselves of is income splitting upon retirement. In this case, by making contributions to the RRSP of the spouse earning less, the couples are reducing their combined bill of tax once the withdrawal begins.

For instance, if you are a higher-income spouse and you put some amount into your partner's spousal RRSP, you obtain the immediate tax deduction. During retirement, your partner will probably be in a lower tax bracket; this means that the withdrawals from their RRSPs will be taxed at a lower rate.

In one case, that of a near-retirement couple, this provided a huge bump in tax liability. The spouse in the higher bracket was able to claim the deduction now; the spouse with the lower income will face much lower tax rates in retirement when they start drawing from their Registered Retirement Savings Plan.

When Is a Spousal RRSP a Good Idea?

There are certain situations where contributing to a spousal RRSP makes more sense. At Canadian LIC, we recommend considering this option if:

• One spouse earns significantly more than the other: The higher-earning spouse can take advantage of the tax deduction, while the lower-earning spouse benefits from future withdrawals at a lower tax rate.
• You want to balance retirement savings: If one spouse hasn’t been able to contribute much to their own RRSP (perhaps due to time off work or lower income), a spousal RRSP helps equalize the retirement savings for both partners.
• You’re looking for long-term tax savings: By splitting income in retirement through withdrawals from the spousal RRSP, couples can often reduce the overall tax burden, especially if the lower-income spouse is in a lower tax bracket.
• You’re planning to retire early: A spousal RRSP allows for more flexible retirement planning. With the ability to withdraw from the lower-earning spouse’s RRSP at a lower tax rate, couples can enjoy a more tax-efficient income stream during early retirement.

What You Should Know About Withdrawals

It's very important to understand how withdrawals from a spousal RRSP work, in particular the three-year attribution rule. What that means is, if your spouse takes money out of the spousal RRSP within three calendar years of your contribution, it's taxed as income for the spouse who made the contribution, not the one taking the funds.

This is one thing we always make sure to clear with our clients here in Canadian LIC. For instance, if you contribute to your spouse's RRSP in 2023 and your spouse then makes a withdrawal in 2024, the amount withdrawn will be assessed as income to you. The rule prevents any couples from making a contribution to a spousal RRSP simply for the funds to be immediately withdrawn at a reduced tax.

Therefore, many individuals will simply wait three or more years beyond the last contribution before taking any withdrawals, which will ensure the withdrawals are taxed in your spouse's name and you can enjoy the full benefit of the income-splitting strategy.

Getting the Right RRSP Quote and Planning for Retirement

At Canadian LIC, we assist clients in understanding the benefits accruing from contributing to the spousal RRSP and offer customized RRSP Quotes to suit their retirement plans. No couple's situation is alike, and it is vital to get proper advice to maximize your savings and minimize your taxes.

By working with our team, you can better understand how a Retirement Savings Plan in Canada works and whether contributing to a spousal RRSP is the best option for you and your spouse. We guide our clients through the process, ensuring that they take full advantage of the available tax benefits and set themselves up for a comfortable retirement.

FAQs

Can both spouses contribute to each other’s RRSPs?

No, only one spouse can contribute to the other’s RRSP. The contributing spouse claims the tax deduction, and the other spouse owns the account.

What happens if the contributing spouse passes away?

The funds in the spousal RRSP belong to the receiving spouse, and they will be able to withdraw or continue with the plan as they see fit.

Can I contribute to a spousal RRSP if I’ve maxed out my own RRSP?

Yes, you can contribute to your spouse’s RRSP using your remaining contribution room. This allows you to take advantage of additional tax deductions.

Are withdrawals from a spousal RRSP taxed the same as a regular RRSP?

Yes, but keep in mind the three-year attribution rule. If withdrawals are made within three years of a contribution, the withdrawal is taxed in the contributor's name.

Can I contribute to a spousal RRSP if my spouse is over 71?

No, contributions to an RRSP are only allowed until the end of the year the spouse turns 71.

When you contribute to the Spousal RRSP, it's a complete game-changer for any couple that needs to equalize their retirements and lower their overall tax burden. We have seen this time and time again at Canadian LIC. Talk to our experts today and start to plan your retirement with the right Registered Retirement Savings Plan.