Maximizing Retirement Savings: RRSP vs. Spousal RRSP

RRSP vs. Spousal RRSP – What contribution is right for you?

Thanks to the leap year, individuals have until February 29th to make RRSP contributions count towards deductions for the 2023 tax year. The income tax filing deadline for individuals is April 30th.

Money put inside an RRSP grows on a tax-deferred basis, meaning an individual can claim a deduction on their taxable income equal to the amount of the contribution and defer paying the taxes on it until they take it out.

Ideally, this would happen after retirement when income typically falls within a lower tax bracket. Essentially paying tax at a much lower tax rate on that same dollar you earned while working, that grew tax sheltered!

For this reason, RRSP contributions have been a very popular savings vehicle for high income Canadians.

The tax deduction, in the very long run, if you look to retirement, is generally only beneficial if you’re contributing at a relatively high tax rate and pulling the money out in the future at a relatively low tax rate.

But what about those high-income earners that need the tax deduction now, but continuing to build up their Registered account is not exactly the most tax efficient way to save extra money for retirement. Some people can find themselves in the same tax bracket (or close to) in retirement than they were while working. This is common for people who have Defined Benefit Pension plans that receive a monthly income in retirement, combined with CPP and OAS, and any other taxable investments. The cumulative total of all your retirement income could have you hovering around the same marginal tax rate.  Benefiting from taking the money out at a much lower tax rate in retirement is now not applicable.

The good news, there are a few work arounds and for those who are married a Spousal RRSP might be your answer.  Quite simply, a Registered Retirement Savings Plan (RRSP) for your spouse. A spousal RRSP is typically utilized when one spouse has significantly more income OR money saved for retirement than the other.

How it works

If you are married or have a common-law partner, you can contribute to a spousal RRSP for your partner and claim the tax deduction. However, your total contributions to your own plan and your partners can’t exceed your allowable maximum contribution.

Once contributed, the money in the spousal RRSP belongs to your partner. As long as spousal money isn’t withdrawn in the same year or next two years, it is treated (taxed) as your partner’s income when withdrawn.

Since spousal RRSPs let you put assets into your spouse's name and eventually have withdrawals taxed in their name, they can help equalize your incomes in retirement. That's a big step towards your family paying the least possible income tax in retirement.

Are there other ways to share income in retirement?

Yes. Pension Income Splitting was introduced to let you share up to 50% of eligible sources of retirement income (such as RRIF, or pension or annuity income) with your spouse. You can choose whether to split any income and, if so, how much to split, when you both file your taxes each year. Since these rules are so flexible, some people wonder if spousal RRSPs are still relevant.

Is a spousal plan right for you?

You get the same immediate tax benefit as contributing to your own RRSP as a spousal RRSP. And with the new pension income splitting rules, you can share up to 50% of your RRIF income with your spouse. So why bother with spousal RRSPs anymore?

There's at least 2 good reasons to still consider spousal RRSPs.

One is if you and your spouse plan to retire in different years. Be careful you don't find the working spouse has all the retirement assets, and the retiree nothing. Pension Income Splitting only lets you share income being received. If the working spouse is not yet drawing on retirement assets or income, they have nothing to allocate to the retired spouse. Building up an initial nest egg for the first retiree will help, and a spousal RRSP might fit as part of that.

Also, Pension Income Splitting rules may not go far enough to equalize and minimize your tax in retirement. You can only share up to 50% of eligible income, which leaves out non-registered income like dividends, interest and capital gains. If your and your spouse's incomes are substantially different in retirement (say because of a large inheritance), a spousal plan may help rebalance your retirement incomes.

Be sure to ask us if a Spousal RRSP is right for you!