Could a spousal RRSP help you?

Most people are familiar with how RRSP contributions can help them save money and reduce their tax bill. For some couples, a spousal RRSP can be an especially effective way to do this.

How a spousal RRSP helps:
Spousal RRSPs are a form of income splitting. They are usually used when the two partners have significantly different levels of income — for example, if one person works while the other stays home to raise children. The net effect is to lower the couple’s overall tax burden in two ways. First, by reducing the higher earning partner’s taxable income during the working years. Second, by paying a lower tax rate when the money is withdrawn by the lower income partner in retirement.

How a spousal RRSP works
Here’s what happens when you set up a spousal RRSP:

• It is also possible to combine a personal RRSP with a spousal RRSP. The totality of the funds will be treated as a spousal RRSP when withdrawn.
• The higher earning spouse or common-law partner makes a contribution to an RRSP registered in the name of the lower earning spouse or partner.
• The contributing spouse receives the tax credit, which reduces their taxable income.
• The recipient spouse will own that RRSP and will be taxed when the money is withdrawn based on their own (usually lower) tax rate.
• However, if the recipient withdraws the money within the first three years, the contributing spouse pays the tax.
• The amount that may be put into a spousal RRSP is based on the contributing spouse’s RRSP contribution room; the recipient spouse’s contribution room is not affected.

It is also possible to combine a personal RRSP with a spousal RRSP. The totality of the funds will be treated as a spousal RRSP when withdrawn.

Know your marginal tax rate
Generally speaking, the goal of tax planning is to reduce a person’s marginal tax rate (the highest rate of tax they pay). In the case of a couple, the greatest benefit is achieved by reducing the taxable income of the person with the highest marginal tax rate. If you’re considering setting up a spousal RRSP, you can easily check your marginal tax rates by entering your current taxable incomes (and estimate what they might be if you were to contribute to a spousal RRSP) into this calculator.

Right for you?
Tax planning can be complex, so it’s helpful to get expert advice. Contact your financial advisor today to discuss an RRSP tax strategy that could involve a spousal RRSP.