Spousal RRSPs can offer tax advantages, but experts say it may not work for everybody

OTTAWA – Canadian couples trying to lower your expenses in retirement may turn to spousal RRSP accounts, though financial experts caution it may not work for everybody.

Aba Quarshie, a financial planner at RBC in Almonte, Ont., said to ensure that a pair to learn from a spousal RRSP there generally have to be differences between the partners.

“We’re searching for imbalances in incomes and in addition perhaps imbalances in age, in order that’s often where we see the best profit,” she said.

“It’s not for everyone. What is nice to your neighbour may not necessarily be good for you.”

Spousal RRSPs can be found to married and common-law couples, who can use the savings vehicle to assist even out income levels in retirement and reduce the overall amount of taxes that you simply each may owe.

In a spousal RRSP, one partner makes a contribution to an account of their spouse’s name while receiving the tax deduction on their very own return. The contribution amount is proscribed by your RRSP contribution room. The contributions don’t affect your spouse’s contribution limit to their plan.

Advisers say typically, the next income spouse makes a contribution to a spousal RRSP belonging to a partner in a lower tax bracket.

Quarshie said there will be benefits if there’s an age difference between the couple.

While you can’t make RRSP contributions after the tip of the 12 months through which you switch 71, if you’ve a younger spouse and unused contribution room you may contribute to a spousal RRSP until the tip of the 12 months that your spouse turns 71.

“You’re in a position to contribute to their spousal RRSP using your unused room and getting the deduction against your income, but then the long run income belongs to the spouse,” Quarshie said.

Prospective homeowners will probably want to consider the choice as well.

Jessie Sidhu, HSBC Bank Canada’s head of branch network for the B.C. region, said having extra money in two separate RRSP accounts may additionally be helpful should you want to benefit from the homebuyers plan to assist fund a down payment.

“For first-time homebuyers, each individual is in a position to borrow as much as $35,000 from their RRSPs as a part of the homebuyers’ plan for a down payment. A spousal RRSP would allow these couples to access as much as $70,000 from their RRSPs to buy their first home,” Sidhu said.

Quarshie also noted that if one spouse dies with RRSP contribution room left, money will be put right into a spousal RRSP for the surviving spouse. She said this ability has the advantage of reducing the deceased’s final tax bill, which is usually a considerable amount.

“It’s something that we frequently search for after we are coping with clients which have lost a spouse,” she said.

Within the case of a divorce or separation, spousal RRSPs are treated similar to other assets. Sidhu said this may present a challenge, as there can often be a big financial strain during a separation.

“As these are case-by-case situations, the couple should seek the recommendation of their lawyer and accountant for support,” she said.

There are also noteworthy restrictions to withdrawals from spousal RRSP accounts.

If you happen to put money right into a spousal RRSP and your spouse takes that cash out, either in the course of the 12 months you made the contribution or in the next two years, you should have to pay the tax on the cash at your tax rate.

“You’d at all times wish to seek the advice of with any of your financial experts before you are attempting and make withdrawals or implement the spousal RRSP,” Quarshie said.

This report by The Canadian Press was first published Feb. 16, 2023.

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