One of the ways to boost your retirement savings for your household is to use a spousal RRSP to split your retirement income. That way, you can improve the tax efficiency of your retirement situation and use your money to best effect.
A spousal RRSP is an RRSP that you make contributions to but the plan is registered in your spouse’s name. You get to claim the tax deduction for your contributions and the income will be withdrawn by your spouse at retirement.
Who Should Use a Spousal RRSP to Split Retirement Income?
It doesn’t make sense for everyone to use a spousal RRSP. Those who benefit most are couples where one partner makes a good deal more than the other partner. With the spousal RRSP to split retirement income, it’s possible to contribute, get a deduction for the contribution and then split income later. This is one way to effectively transfer some of your income to your spouse or common law partner. When taxes are paid, it turns out that your tax bracket is lowered enough that, as a couple, your total household tax bill is smaller.
On the other hand, if your and your spouse’s income are about the same, and you both have similar pensions and RRSP savings, then this wouldn’t be of any benefit to your retirement income planning. You and your spouse are already in similar tax brackets, and the situation is going to be the same for both of you, so shifting income from the higher earning partner to the lower earning partner does nothing.
If you decide to use a spousal RRSP to your benefit, there are some things to keep in mind. The contributions you make to both your RRSP and your spouse’s RRSP must be within your maximum contribution limit; you don’t get to use your partner’s limit for your contributions to their plan. If a withdrawal is made within three tax years (two calendar years plus the year of withdrawal) then it would be taxed to the contributor, defeating the point of the plan (but providing an option to access the money in an emergency).
Some Canadians think that a spousal RRSP is no longer needed now that pension splitting has become allowed. I suggest that you still look into spousal RRSPs. If one spouse is in a higher tax bracket, this also means that investing through a spousal RRSP would give you that higher tax deduction in the current year. Equally important is how future politics could affect your retirement. While the current government brought in pension splitting, there’s no guarantee that future governments (10 to 30 years from now) will still allow it. With spousal RRSPs, as soon as you contribute to it that investment immediately belongs to your spouse, making this a form of pension splitting that you can still rely on for your retirement years.
If one spouse is in a higher tax bracket or expects a large pension at retirement, it makes sense for that spouse to contribute to a spousal RRSP. As a couple you receive a larger tax deduction that year and the income at retirement would be more even, keeping both of partners in lower tax brackets for further tax savings and possibly helping the couple avoid an OAS clawback.