Everything you need to know about your spousal RRSP

In Canada, we have a progressive tax system. This means that as your personal income increases, so do your tax rates. Interestingly, if you and your spouse have a large income gap, you could pay more taxes together than a couple with the same total income but split more evenly.

The spousal RRSP is a special type of registered retirement savings plan (RRSP) designed to help balance things out, both now and down the road.

This article will walk you through spousal RRSPs and answer these key questions:

● What is a spousal RRSP, and how does it work?

● Who's eligible to start a spousal RRSP?

● What are the benefits of a spousal RRSP?

● How can I contribute and withdraw from a spousal RRSP?

Don't forget to check out the FAQs for quick answers to people's most common questions.

What is a spousal RRSP, and how does it work?

A spousal RRSP is a tax-advantaged savings account that allows you to contribute to your spouse or common-law partner's retirement each year, up to your personal limit. It can help balance your couple's income, especially if there’s a big difference between what you both earn.

The table below demonstrates how income splitting with a spousal RRSP can work. In this scenario, a couple withdrawing identical amounts can achieve annual tax savings of $10,000 by utilizing a spousal RRSP.

Unlike a regular RRSP, a spousal RRSP has one spouse (or common-law partner) as the account holder (annuitant) and the other as the contributor.

Key points to remember:

● It helps couples balance their retirement income.

● Usually, the higher earner contributes for the lower earner.

● The rules for contributions and withdrawals are similar to those of regular RRSPs.

Who can open a spousal RRSP?

Married or common-law couples can use spousal RRSPs. Typically, the higher-earning spouse contributes to their partner's account.

Setting one up is simple! Banks, credit unions, and most brokerages across Canada can assist you in getting started and provide guidance on RRSP types and investment options.

To open a spousal RRSP (SRRSP) account on moomoo, you can submit an application in the app or on the website. Click here to check the detailed account opening instructions.

What are the benefits of a spousal RRSP?

Spousal RRSPs provide all the benefits of regular RRSPs, along with some added advantages. Here’s how they can enhance your retirement savings:

● Tax Deduction: Contributions reduce the contributor's taxable income.

● Income splitting: At retirement, you can split your income to lower your tax bill.

● Home Buyers' Plan (HBP): Each spouse can borrow up to $35,000 for a first home, totaling $70,000.

● Lifelong Learning Plan (LLP): You can withdraw up to $20,000 interest-free for education and repay it later.

● Contributions after age 71: If you have contribution room, you can still contribute to a younger spouse's RRSP even after turning 71.

How can I contribute and withdraw from a spousal RRSP?

● Contribution:

When you contribute to your partner's spousal RRSP, you can receive a tax deduction. However, keep in mind that these contributions count against your own contribution room, not your spouse's.

For example, if you have $20,000 available, you can divide it between your RRSP and the spousal RRSP as you wish—maybe $15,000 to one and $5,000 to the other. Just be sure not to exceed your limit.

A spousal RRSP doesn’t provide extra contribution room; it’s simply a different way to utilize your existing limit. The great news is that you can continue contributing to your spouse's plan until they turn 71, even if you yourself are over 71!

● Withdrawal:

Once you contribute to a spousal RRSP, the money belongs to your partner, who is the account holder. They have control over investment decisions and withdrawals.

Be aware of the three-year attribution rule that comes into play with spousal RRSPs. For instance, if you contribute this year and your spouse withdraws any money within the next two years, you'll be taxed on that withdrawal. Certain exceptions may apply.

It’s wise to wait before making withdrawals from any RRSP, including spousal ones. As people get older, they often find themselves in lower tax brackets, which means less tax on withdrawals. It’s like being rewarded for your patience!

FAQs

1. What's the contribution limit for a spousal RRSP?

You can contribute up to 18% of your earned income, with a maximum of $32,490 for 2025, plus any unused contribution room from previous years. This limit applies across all your RRSP accounts combined. For instance, if your annual limit is $10,000 and you contribute $5,000 to a spousal RRSP, you'd have $5,000 remaining for your personal RRSP.

Note that your contributions to a spousal RRSP don't affect your spouse's contribution limit; they only impact your own available room.

2. When can I withdraw money from a spousal RRSP?

You can withdraw money from a spousal RRSP at any time, but it's crucial to consider the tax implications. Generally, withdrawals are added to the account holder's annual income and taxed accordingly.

However, if you withdraw funds within three years of your spouse's last contribution (attribution period), your spouse will be taxed on the contributions made during that time.

3. How are spousal RRSPs handled in a divorce?

In most Canadian jurisdictions, assets accumulated during marriage, including RRSPs, are generally subject to equal division upon divorce. While there’s no strict requirement for asset splitting, the law allows for equalization payments or transfers between spouses.

This can involve transferring part or all of an RRSP or spousal RRSP from one spouse to the other, either through mutual agreement or a court order. This process ensures a fair distribution of marital assets, with the spouse who holds more assets compensating the other.