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Retirement planning for two

Why a spousal RRSP might make sense for your household. 

Sharing tasks and chores, such as laundry, cooking, cleaning and grocery shopping, makes sense for many Canadian households – but have you considered the financial benefits that come with sharing contributions to retirement investments?

Registered retirement savings plans (RRSPs) are popular among Canadians who are interested in building a future nest egg. Here’s some key information on this type of plan:

  • Generally used for saving for retirement
  • Contributions are tax-deductible and investments grow tax-free within the plan
  • Both contributions and investment earnings are taxable upon withdrawal
  • Withdrawals are included in income and affect eligibility for federal income-tested benefits and tax credits, such as child tax benefits and Old Age Security

Spousal RRSP 101

A spousal RRSP is an income-splitting strategy that offers tax savings for couples with earnings in two different tax brackets. The spouse or common-law partner earning the lower income is the owner of a spousal RRSP plan. The partner with higher earnings makes the contributions to the plan and gets the resulting tax deductions. When a withdrawal is made from the RRSP, it is taxed at a marginal tax rate based on the lower earnings of the plan’s owner (subject to the below attribution rules). 

The advantage of a spousal RRSP is that it can provide you with opportunities to split income before and after retirement. Tax savings are realized when the spouse in the lower tax bracket takes income from the plan. The net effect is that the couple will pay less tax overall.

Attribution rules

Withdrawals from a spousal RRSP will be taxed in the spouse’s hands provided that the contributor has not contributed any amount in any spousal plan in the current or preceding two calendar years. If the spouse makes a withdrawal before maturity and the contributor has deposited cash or other assets to any spousal RRSP in the current or preceding two calendar years, the amount withdrawn (up to the amount of the contributor’s deposit) will be included in the contributor’s income for that year.

Tax savings example  How income splitting can save $2,400   	Individual RRSP – 40% tax rate ($)	Spousal RRSP – 20% tax rate ($) RRSP income/withdrawal	12,000	12,000 Taxes payable	4,800	2,400 After-tax income	7,200	9,600 Tax savings (annually)	 	$2,400  For illustration purposes only, Manulife Investment Management

It’s important to realize that the spouse who opens the RRSP is the legal owner of the plan and can make all investment decisions and withdrawals.

How much can you contribute?

The first step in setting up a spousal RRSP involves determining available contribution room, which can be found on the most recent notice of assessment provided by the Canada Revenue Agency. For 2023, the contribution limit is 18 per cent of the individual’s 2022 earned income to a maximum of $30,780, plus any contribution room carried forward from previous years. The contribution limits for a spouse/partner are not affected by contributions made by the higher earner into a spousal RRSP. Provided you have sufficient earned income, contributions can be made to a spousal RRSP until the end of the year in which your spouse turns 71.

Transfers and withdrawals

The potential tax benefits of a spousal RRSP might prompt some questions. Here are a couple that might come immediately to mind:

Can funds be transferred from the personal RRSP of the higher tax bracket spouse to the spousal RRSP owned by the lower tax bracket spouse?

No. Funds can be transferred only between RRSPs owned by the same person. It’s also recommended that spousal and non-spousal RRSPs remain separate, otherwise you run the risk that all will be deemed spousal, which has attribution consequences (see above). 

When can funds be withdrawn from a spousal RRSP?

Funds can be withdrawn from a spousal RRSP whenever you like. However, withdrawals will need to be included as income and are subject to tax in the year of withdrawal (subject to the attribution rules). The owner of the spousal RRSP (lower tax bracket spouse) is the only person who can withdraw funds. The contributor (higher tax bracket spouse) is not entitled to make withdrawals. 

Spousal RRSPs can play an important role in your overall investment and tax strategy. Speak to your advisor, who can help to map out spousal contribution amounts that work best for your tax bracket, household budget and retirement goals. 

More information about retirement investments is available here

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