A spousal* RRSP is exactly what it appears to be, quite simply a Registered Retirement Savings Plan (RRSP) for a spouse; a plan that can not only help your client and their spouse set aside funds for their retirement, but can save them some tax dollars in the process. The general idea of the spousal RRSP is that one person, typically the higher earner, contributes money to the plan on behalf of their spouse. The main benefit for your client is that a contribution can be made each year (subject to your client’s contribution limit) and their spouse will see a tax-free return until those assets are withdrawn.
Typically, a spousal RRSP is utilized when one spouse has significantly more money in their RRSP than the other. By splitting the invested amount between an RRSP and a spousal RRSP, each of them can enjoy retirement dollars and potentially pay less tax by withdrawing the funds when they are both in a lower tax bracket. It’s a win-win!
Let’s see how this works for your client…lets assume that your client earns $100k and their spouse earns $50k. Given RRSP contribution limits of 18%, they can deposit $18k and their spouse can deposit $9k into their respective RRSPs. However, if they are using a spousal account, they can deposit $13k to their own account and $5k to the spousal account. Your client’s total contribution is still $18k, but it is now divided over two accounts, allowing your client to split the income with their spouse. Their spouse can still deposit the original $9k into that spousal account.
The scenario becomes a little different for your client without a spousal RRSP. For example, if our client has $1 million upon retirement and their spouse has $400k, a standard 5% withdrawal rate would result in taxable income of $50k for your client and $20k for their spouse. It is expected that your client’s $50k annual withdrawal will be taxed at a higher rate. Yet, if a spousal RRSP had been set up, both accounts could have accumulated $700k each (same total amount) and taken out an annual income of $35k per person, resulting in tax at a lower rate.
A spousal RRSP can also help to save on taxes if your client is over 71 years of age, but their spouse is not. By helping your client to open a spousal RRSP, contributions can be made on behalf of the spouse that is not over 71 and an income deduction can be claimed on that deposit. In addition, spousal RRSP payments can still be made in the year of death.
It is also worth noting that contributions to a spousal RRSP must remain in the fund for three calendar years from the year they are contributed or else the withdrawal amount will be added to your client’s net income for that year and your client will have to pay taxes.
*spouse includes a common-law partner