THUNDER BAY – BUSINESS – If you’re not familiar with registered retirement savings plans (RRSPs), click here to see my previous article on why you should contribute to an RRSP. Spousal RRSPs are a practical way for couples to split their income. They will help defer taxes immediately and could reduce taxes when you retire. If one spouse has much higher income than the other, spousal RRSPs are even more beneficial.
The benefit of income-splitting
Income splitting will allow families to reduce their overall taxes by shifting income from the higher income spouse to the lower income spouse, so that the same amount of income is taxed at a lower rate.
How this benefits you in retirement
When you make the choice to contribute to your own RRSP or a spousal RRSP, the immediate benefit is that the contribution you make can provide a tax deduction against your income. However, by using a spousal RRSP you’ll benefit in retirement as the family tax bill will be reduced since there will be income for both spouses to withdraw from.
A spousal RRSP can also be used to defer taxes even when you’re retired; if you’re over 71, you’re no longer able to contribute to your own RRSPs, but as long as your spouse is 71 or younger you can contribute to a spousal RRSP and still claim the tax deduction.
The three year attribution rule
This rule was put in place to prevent a high-income earner from contributing to a spousal RRSP, then immediately withdrawing at a lower tax rate. If a contribution made into a spousal RRSP is withdrawn within three years, the income will be taxed to the spouse who received the tax deduction at the time of the contribution. If the withdrawal is made after three years, the income will be taxed to the spouse whose name the RRSP is in. There are a few exceptions to the three year attribution rule; click here to see them.
The bottom line
If you have questions about spousal RRSPs, please contact me.
Anthony M. Talarico
Financial Security Advisor