Consider a Spousal RRSP to Maximize Retirement Income and Reduce Taxes

Planning your retirement future with your spouse or significant other can have financial benefits if you plan on opening up a spousal RRSP. But this is one of the lesser known varieties of the retirement savings plan; at least it is one that garners less attention than it should. The plan allows couples to pool their incomes and if one earns more than another, that partner may add to the amount contributed by the partner with less income. This gives an immediate tax advantage and increases the amount of funds available for retirement. Plus, should something unforeseen happen it leaves both spouses better protected monetarily.  


Pensions may be split by no more than 50 percent. For example if you draw $2,000 each year from your pension income you may share at most $1,000 with your partner. If you have a spousal RRSP that’s been in effect for decades and that money has done well, you end up with more available income to split. At the same time your partner pulls additional funds out of their RRSP, leaving you with more breathing room per month.


This sort of plan works for married couples as well as those in common law relationships. The spousal RRSP is particularly beneficial for those not expecting a pension plan from another source, such as an organized union job. The partner making the most money typically does most of the contributing, therefore getting the advantage of being in a lower tax bracket. This also gives you more available funds for day to day living.


A spousal RRSP also allows you to make contributions as long as one partner is under age 71. This is the age when RRSPs must be closed and rolled over into some sort of registered retirement income plan which means no more contributions may be made. The alternative is to take the funds and invest in some sort of fixed income annuity. If one of the partners in a spousal RRSP has yet to reach that cut off age, they may still make contributions.


As with all retirement plans, the sooner you set up an RRSP the better. It will allow you to calculate your available funds upon retirement more easily. If you start this plan late you may not have accumulated enough assets to make pulling funds and splitting them beneficial. This is especially true if one spouse is expected to have an income on the low side when reaching retirement age.


You should be aware of the spousal RRSPs’ three-year attribution requirement. It is unique and states that if you put money into your spousal RRSP and your partner pulls those funds, all or in part, within three years the contributor will end up paying personal income tax on those funds. The income splitting benefit is limited to your retirement years.  Funds pulled out of the three year window are treated as normal RRSP withdrawals, as long as the amount pulled doesn’t exceed what was in the account three years prior. Upon the death of a partner this rule no longer applies. At that time the spousal RRSP converts to a RRIF, registered retirement income funds and is treated under the applicable rules.


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