What is a Spousal RRSP?

A spousal RRSP (Registered Retirement Savings Plan) is a type of RRSP that’s available in Canada to married couples and common-law partners. It allows spouses to accumulate retirement savings while potentially lowering the total amount of tax they pay – both now and in retirement. If you and your spouse or common-law partner have different incomes, a spousal RRSP can be a useful tool to enhance your combined retirement savings and reduce their taxes. In this article, we explain how a spousal RRSP works, explore how it differs from a personal RRSP, discuss spousal RRSP contributions and withdrawals, and look at other ways to maximize retirement income.

How does a Spousal RRSP Work?

Unlike a personal RRSP, where you are only allowed to contribute to your own plan, a spousal RRSP allows a spouse or partner – typically the higher-income one – to contribute to the lower-income spouse’s RRSP, up to their personal contribution limit. Spousal RRSPs work best when there are differences in income and savings levels between the spouses. With a spousal RRSP, the spouse making the contribution receives the tax deduction, while the lower-income spouse gets a boost to their retirement savings. This can help to reduce a couple’s combined taxes in two ways:

1. The higher-income spouse receives a tax deduction that can potentially lower their taxes for the year the contribution is made.
2. When the lower-income spouse starts to withdraw funds from their RRSP, they will be taxed at a lower rate compared to their higher-income partner.

Contributing to a Spousal RRSP

Contributions you make to a spousal RRSP reduce your RRSP contribution limit; however, your contributions don’t affect your spouse’s RRSP contribution room. Although you cannot contribute to your own RRSP after December of the year you turn 71, you can still contribute to your spouse’s or common-law partner’s RRSP until December of the year that they turn 71.

Spousal RRSP Contribution Limits

The total amount you can deduct for contributions you make to your own RRSP plus that of a spousal RRSP cannot be more than your total RRSP contribution limit. For the 2023 taxation year, you are allowed to contribute $30,780, or 18% of your earned income the previous year, whichever is less, plus any unused contribution room.

Spousal RRSP Withdrawal Rules

Since a spousal RRSP belongs to the lower-income spouse or common-law partner, they alone can make withdrawals from their spousal RRSP. As they typically will withdraw funds when they retire (after converting their plan to an annuity or a Registered Retirement Income Fund), they will usually be in a lower tax bracket and face less tax on any amounts withdrawn. However, if the spousal RRSP account holder decides to withdraw funds before they retire, they are bound by the three-year attribution rule.

Spousal RRSP Attribution Rule

The three-year attribution rule states that, from the time a spousal RRSP contribution is made, it must stay in the account of the lower-income spouse for the remainder of the calendar year – plus two more years – before any money can be withdrawn from the plan. If the contribution is withdrawn before the three years, the amount of the contribution will be included in the contributor’s taxable income.

Benefits of a Spousal RRSP

The main benefit of a spousal RRSP is that it allows couples to split income in retirement and take advantage of lower tax rates, which can leave more money in the hands of the married couple or common-law partners. Here are some of the other benefits.

Buying a first home:

If the higher-income spouse has been contributing to a spousal RRSP, the couple can each take out the maximum of $35,000 from their RRSPs under the Home Buyer’s Plan.

Continuing education:

The lower-income spouse can take advantage of the Lifelong Learning Plan, which allows withdrawals of up to $10,000 from their RRSP to fund training or upgrade their education.

Contributions after age 71:

Although you can’t contribute to your own RRSP after 71, you can still contribute to your spouse’s RRSP – and receive a tax deduction – if your spouse is younger than 71.

Cons of a Spousal RRSP

There are two main disadvantages of a spousal RRSP. The first, as discussed above, is the three-year attribution rule, which states from the time a spousal RRSP contribution is made, it must stay in the plan for the remainder of the calendar year plus two more years. The other disadvantage is that there are limits on the amount that can be contributed to a spousal RRSP, based on the contributor’s available contribution room.

Supplement Your Retirement Income with a Reverse Mortgage

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Frequently Asked Questions about Spousal RRSPs

When is it a good idea to use a spousal RRSP?

Spousal RRSPs work best when there is a large disparity in incomes between spouses or common-law partners. It allows spouses to accumulate retirement savings while potentially lowering the total amount of tax they pay in retirement.

Who gets the deduction when contributing to a spousal RRSP?

The spouse who contributes to a spousal RRSP can claim a tax deduction for their contribution.

Can both spouses contribute to a spousal RRSP?

Yes, both spouses can contribute to a spousal RRSP, assuming that they have available contribution room.

What happens to spousal RRSP after divorce?

A spousal RRSP presents a challenge for a couple filing for divorce. Since both spouses may have contributed to the spousal plan, both will have some claim over the assets. Usually, the spousal RRSP will be included as part of the full list of the couple’s assets, meaning that it will be treated as family property – to be evenly divided – after a divorce.