Gabriel Lalonde
December 8th, 2021

Spousal RRSPs Explained in Simple Terms

As the name suggests, a Spousal* RRSP is a Registered Retirement Savings Plan (RRSP) for a spouse. The plan helps to set aside some funds for you and your spouse when you both retire. But more than that, it also helps you save some dollars in tax.

In a spousal RRSP, the spouse that earns more will contribute money to the plan on behalf of the other spouse. The first benefit of this is that the contribution can be once every year. The second is that it comes with a tax-free return for the receiving spouse until you withdraw the assets from the plan.

How does it work? It’s worth noting that the RRSP contribution limit is 18%. So, if you earn $150k and your partner earns $100k, you can deposit up to $27k to your own RRSP, while your spouse can deposit up to $18k to theirs.

But with a spousal account, you can deposit $20k to your RRSP account and $7k to the spousal RRSP account. Yes, your total contribution remains $27k, only that you have spread it over two accounts. You have now split the income with your spouse without preventing them from depositing their own $18k into their RRSP account.

It’s a different scenario without a spousal RRSP. For example, assuming you have $1.5 million and your spouse has $500k after retirement. The 5% withdrawal rate is standard, and if applied, translates to a $75k taxable income for you and $25k for your partner. But, your $50k annual withdrawal will attract a higher tax rate.

A spousal RRSP helps you avoid this. For starters, the two accounts (yours and your spouse’s) could have a uniform total amount of $1 million each. So, in that case, the annual income would be $50k per spouse, which means a lower tax rate.

You can also use a spousal RRSP to cut taxes if you OR your partner is over 71. In that case, the contributions can be made on behalf of the younger spouse, while claiming the income deduction on these contributions. Even in the year of death, the paying spouse can still make the spousal RRSP payments.

To round up, let’s quickly note that it is required to hold the contributions to a spousal RRSP in the fund for three years. This timeframe starts from the year of contribution. And if this condition is not met, the withdrawal amount is added to your net income for that year. Thus, the taxes are charged at the normal tax rate.

NB: “Spouse/Spousal” as used in this text includes a common-law partner.

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About Gabriel Lalonde, CFP, CFEI, B.A.

When Gabriel is not crunching numbers, you can find him accompanied by his beautiful wife Ana and son Théo, either on the golf course in the summer or the ski slopes in the winter. His dream has always been to take over the family business as he saw first hand how much impact his father had on shaping peoples lives and creating long lasting legacies. Gabriel has a true passion for financial literacy and he believes everyone should have access to solid financial education.

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