Six tips on using spousal RRSPs

A powerful income-splitting strategy

The spousal Registered Retirement Savings Plan (RRSP) is one of those often-overlooked gems in a long-term retirement income planning strategy, one that you shouldn’t overlook in the RRSP top-up discussion before the March 2 deadline. It’s the contributor who gets the RRSP deduction based on his or her own RRSP room, but it’s the annuitant spouse that will draw on the money later, according to special rules. Here are six basic “must-know” tips:

1. Individual RRSP ground rules. When a contributor opens a regular RRSP, contributions to that RRSP are based on his or her own RRSP contribution room and age eligibility. Any contributions made to that account may be claimed as a tax deduction by the taxpayer and any later withdrawal (of principal and earnings) from that account are taxable to the taxpayer. In the case of a couple, a lower-income spouse may open his or her own individual RRSP account and contribute to it based on their own RRSP contribution room, as well. In either case, the RRSP deduction can be postponed, if this is a year of low income. That’s another little-known tax fact.

2. How is a spousal RRSP different? A contributor may open a spousal RRSP account for his or her lower-earning spouse or common-law partner, based on the contributor’s own RRSP contribution room. There are several advantages. For older couples, there is an age eligibility restriction: No contributions are allowed to be made to an RRSP for someone who is age 72. But a contribution can be made to a spousal plan based on the younger spouse’s age. This makes the spousal RRSP a great planning tool when the contributor still has RRSP contribution room but is no longer age-eligible. For younger couples, equalizing contributions in each spouse’s RRSP is the ultimate goal, especially in cases where they don’t wish to wait to age 65 to income split.

3. Who owns the spousal RRSP? A spousal RRSP is the property of that annuitant spouse, not the contributor. Any withdrawals from a spousal RRSP are taxed as income of the spouse (annuitant) unless there have been contributions made by the contributor in the current or previous two taxation years. In that case, the contributor must report the lesser of the contributions in that period and the amount of the withdrawal.

Once the three-year period has passed, and as long as no further spousal contributions are made, any income withdrawn from a spousal RRSP will be taxed to the annuitant and not attributed back to the contributing spouse. However, if an additional spousal contribution is made in the future, the attribution rules again apply to withdrawals made in that year or either of the subsequent two years.

4. Exception to the three-year rule: RRIF withdrawals. There is an exception to the three-year attribution restriction. Spousal Registered Retirement Income Funds (RRIFs) are those that are established with funds originating from a spousal RRSP. Within the three-year non-contributory period, the income attribution rules apply only to withdrawals from the spousal RRIF above the minimum amount. As long as the withdrawals are limited to the minimum amount, they will not be attributed back to the contributor, even though contributions may have been made to a spousal RRSP within the previous three years.

Normally, there is no particular advantage to opening a RRIF prior to either spouse turning 65, unless the income is needed by the client (recall, this is the age at which you are eligible for income-splitting benefits with your spouse on withdrawals from an RRSP/RRIF). Once the RRIF is opened, annual withdrawals must be made, and no additional contributions can be made into the account.

5. Transfers between RRSPs. It is also possible to make transfers between RRSPs on a tax-free basis. However, some caution is required here. It’s true that transfers may be made to or from a spousal RRSP without tax penalties. For example, if the transfer is from a spousal RRSP to that spouse’s regular RRSP, then the regular RRSP also becomes a spousal RRSP. So, remember these consequences if you are thinking about consolidating any of your spouse’s original RRSPs in a spousal RRSP.

6. Create a more flexible, tax-efficient retirement. Spousal RRSPs are an important component of any tax-efficient retirement income plan for every couple. It makes sense to contribute in the pre-retirement period, with the goal to equalize income in retirement and circumvent age restrictions, while benefiting from tax savings and an increase in refundable tax credits, too. This works well because an RRSP deduction reduces the net income upon which income-tested benefits are based. Old Age Security (OAS), for example can also be sheltered from clawbacks in some cases, resulting in more income for the senior couple.

But remember, RRSP planning cannot be done in retrospect. Too many times, couples accumulate all the RRSP funds in the hands of the higher income earner and the only way to income split in that case is to wait until age 65. The opportunity is to try to lower marginal tax rates early in the retirement period if possible, and structure RRSP income withdrawals between the spouses to avoid OAS clawbacks. Alternatively, healthy couples may wish to maximize RRSP withdrawals and income-splitting opportunities in the period between age 60 and 70, while deferring Canada Pension Plan or Old Age Security benefits until age 70 to increase those public pensions later. A spousal RRSP can help achieve some of those goals in the retirement start-up years.

Evelyn Jacks is an award-winning financial educator, best-selling author, tax expert, and founder of Knowledge Bureau™, a widely respected financial education institute and publisher which has welcomed thousands of students from the various financial services to its online and in-class programs. Follow Evelyn Jacks on Twitter @EvelynJacks. Visit her blog at www.evelynjacks.com.

Speak to an MFA™-Retirement & Succession Services Specialist for help on spousal RRSPs. Or consider taking the Tax Efficient Retirement Income Planning course online, featuring outstanding retirement planning software from Knowledge Bureau so you can use to make more informed decisions.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.