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Should you contribute to a spousal RRSP?

A man giving a woman a piggy back outdoors.

Spousal registered retirement savings plans (RRSPs) can help lighten the tax load for some couples — both now and in retirement.

Open to both married and common-law couples, a spousal RRSP is a retirement vehicle that allows a higher-earning spouse to make contributions to an RRSP account in their partner’s name — and benefit from the tax deduction.

Spousal RRSPs work best when there is a large disparity in incomes between partners. If you’re the spouse with the higher income, you’ll use up some of your contribution room to invest in the spousal RRSP, but in retirement, your spouse is the one who withdraws from it. The result? Less tax owing overall.

The advantage of income splitting

The main advantage of a spousal RRSP is that it allows a couple to split their RRSP income during retirement and take advantage of lower marginal tax rates. In other words, you’ll pay less tax on two incomes of $50,000 than one income of $100,000.

Even without a spousal RRSP, couples can split up to 50% of eligible pension income. This can include withdrawals from a registered retirement income fund (RRIF) or income from a registered company pension plan.

But with a little advance planning, a spousal RRSP could let you move more than 50% of your pension income to your spouse, something that might be useful if you have other sources of income when you retire. 

But don’t forget about the rules

Once you open a spousal RRSP, your partner owns it — they make the investment decisions related to the account, and only they can decide when to withdraw. That’s an important fact to understand because it could lead to issues down the road should a divorce or separation happen.

Spousal RRSPs are meant for long-term retirement savings. If money is withdrawn within three years of a contribution, the funds will be taxed as your income — not your spouse’s (this is called the three-year attribution rule). For example, if your most recent contribution to a spousal RRSP was 2022, your spouse should wait until 2025 to make any withdrawals. Otherwise, the withdrawal will be added to your income — and your tax bill.

When a spousal RRSP works: 4 scenarios

Here are some situations where a spousal RRSP might be a good idea.

  1. Buying your first home

Shazia and her partner, Jeff, are ready to buy their first home. They are looking to take advantage of the Home Buyers’ Plan (HBP), which allows a new home buyer to withdraw up to $35,000 from their RRSP with no penalties.

As the higher income earner, Shazia has been contributing to her own RRSP and to a spousal RRSP for Jeff. This means that Shazia can withdraw $35,000 from her RRSP, and Jeff can also withdraw $35,000 from the spousal RRSP (even if it’s less than three years since the last contribution).  

The couple will have to put this money back into their RRSPs over the next 15 years. (To count as an HBP repayment, Jeff must contribute to his own RRSP, not the spousal RRSP. Shazia cannot contribute to the spousal RRSP and consider it a repayment of Jeff’s HBP withdrawal.) If they don’t make the repayments, there is a tax penalty: 1/15 of the withdrawn amounts would be treated as their income each year, on which they would need to pay tax.

  1. Planning to have children

Iris and Zander are a recently married couple who would like to have a child in the next five years. Iris plans to take extended parental leave from her job after having a child and use her spousal RRSP as additional funding.

As the higher income earner, Zander can contribute to the spousal RRSP now and benefit from a tax break of up to 50% of the contribution. When the couple has a child, Iris can then withdraw the funds at a much lower tax rate (assuming the three-year attribution rule isn’t an issue). Note, however, there is a withholding tax when you withdraw.

  1. Retiring before age 65

Alice is planning to retire at age 62 and would like to split her retirement income with her spouse, Maxime, who is in a lower tax bracket. Under pension income-splitting rules, Alice needs to be at least 65 to split her RRSP or RRIF income with Maxime. But the couple’s spousal RRSP gives them the flexibility to make withdrawals at any age and receive retirement income that is taxable in the lower tax bracket.

  1. Making contributions beyond age 71

At age 72, Franco is still working full-time. He converted his RRSP to a RRIF in the year after he turned 71. However, because his wife is 65, Franco can keep contributing to her spousal RRSP until the end of the year she turns 71 — and still benefit from the tax break.

Under the right circumstances, a spousal RRSP can be an important part of a couple’s retirement plan. And for the lower-earning spouse, simply having the peace of mind knowing they have some money in retirement savings can’t be discounted.

Thoughtful planning and advice from MD Financial Management can help you save more and rest easier. Contact an MD Advisortoday to make the most of your RRSP contribution. We can help you explore the ideal strategies for you (like spousal RRSPs and income splitting) to best achieve your financial goals.

READ MORE: How spousal RRSPs help with tax savings in retirement

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.