Why would I contribute to a Spousal RRSP instead of or in addition to a Personal RRSP?
A personal RRSP works on the concept that your taxable income during your working years will be higher than your taxable income during retirement. When you make an RRSP contribution, you get a tax deduction. By making an RRSP contribution while you are still working, you get the benefit of not having to pay tax on the amount of money that you put into your RRSP. The tax becomes deferred until you make a withdrawal, as does the taxes on any gains that you earn while you are still in the plan.
A spousal RRSP is similar. You put the funds in on your spouse’s behalf and the contribution reduces your taxable income – which means that you get the deduction. The concept here is that when your spouse makes a withdrawal in the future, he or she will pay less tax due to his or her tax bracket being lower than yours. Your taxable income will also be lower in retirement, as you’ve shifted some of these registered assets into your spouse’s name. There are other good reasons to have retirement income in both your name and your spouse’s name. Here are a few:
After age 65, money coming out of the RRSP in the form of a Registered Retirement Income Fund or Annuity allows your spouse to gain access to the Pension Income amount, which is a non-refundable tax credit. There are two benefits to this strategy. By making contributions and splitting income early on, you set yourself up to pay less tax during your retirement, as money that would be in your name is now in your spouse’s name. Secondly, your tax rate is usually lower during your retirement than during your working years.
What are Attribution Rules?
The money that you put into a spousal RRSP is supposed to be earmarked for retirement. If a deposit is made into a spousal RRSP and the other spouse withdraws the money within three years of the deposit, the money that is withdrawn will be taxable in the hands of the contributing spouse. The CRA came up with attribution rules to keep the higher income earner from putting money in, taking the deduction, and having the lower income spouse take the money out in the following year.
Is it a Good Idea?
While every situation is unique, a spousal RRSP can be a good tool. It is useful when there is a substantial difference between the amount of income that you make and the amount of income your spouse makes. It also has a place when one spouse is enrolled in a pension plan and the other is not. If you will have tax owing this year, it makes even more sense to contribute. Spousal RRSPs are a good way to save tax now and split income during retirement.