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What is a Spousal RRSP?

By Inspired Investor Team

Published February 2, 2024 • 4 Min Read

In the intricate dance of managing finances as a couple, optimizing your retirement savings becomes one of the key dance steps. One sometimes helpful move is a Spousal Registered Retirement Savings Plan (Spousal RRSP), which can offer some financial and tax benefits for couples.

A Spousal RRSP is a registered retirement savings plan designed for couples, married or common-law, and allows one partner to contribute to the other’s RRSP. The individual contributing to the Spousal RRSP get the tax deduction, but the plan is in the non-contributing spouse or common-law partner’s name. This setup allows couples to balance their retirement income now and down the road.

The advantages of a Spousal RRSP

One key advantage of a Spousal RRSP lies in the ability to split retirement income between spouses. Because of Canada’s graduated income tax system, when one spouse or common-law partner has a higher income than the other, the higher-earning individual usually pays tax on their earnings at a higher rate. For example, if one spouse is earning a high salary, they could pay tax at rates as high as 50 per cent or more, while the lower-earning partner may pay 30 per cent. A spouse or partner not earning employment income may pay no income tax at all.

If you and your spouse or common-law partner have significantly different incomes, the higher-earning individual could contribute to a Spousal RRSP for the lower-earning individual. That way, as a household, you can take advantage of the different tax rates, allowing a higher earning spouse a larger tax deduction, and a lower earning spouse paying less tax upon withdrawal. This may keep more money in the family’s pocket. In addition, individuals can’t contribute to their own RRSPs after Dec. 31 of the year in which they turn 71. However, they can continue to contribute to the spousal RRSP if their spouse is still to turn 71 and they have contribution room available.

Timing considerations

When to consider a Spousal RRSP hinges on a few factors, including differences between partners’ incomes, the spouses’ individual retirement plans, and age. If there’s a notable difference in income levels and income potential between partners, contributing to a Spousal RRSP regularly earlier in their working years can maximize the long-term tax benefits and allow for the investment to grow.

Additionally, if one spouse plans to retire earlier than the other, contributing to a Spousal RRSP before the first partner retires can set the stage for more balanced income distribution, and a potentially lower tax bill during retirement.
Ultimately, a Spousal RRSP isn’t just about optimizing taxes; it’s about creating a solid foundation for a more equitable retirement and a healthy financial future together .

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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