Save Taxes with a Spousal RRSP: All You Need to Know

Did you know that your marriage or common law partnership in Canada can help you save taxes? How? Through a Spousal RRSP.

Now, you probably already know all about RRSPs or Registered Retirement Savings Plans and may even have an individual RRSP to save up for retirement. Your employer may also have a retirement plan set up for you in the form of a Group RRSP. Through an RRSP, you can invest in several investment products such as mutual funds*, GICs (Guaranteed Investment Certificates) and stocks. RRSPs are a great savings plan and so commonly used because not only do they help you to grow your wealth but save on taxes too. This is because no taxes are applied on your contributions to the RRSP, plus taxes on the RRSP amounts are deferred until you retire, allowing you to grow your savings even more. When it’s time to pay taxes in your retirement, you’ll most likely be in a lower tax bracket, saving you even more money.

The latest type of RRSP that you can opt for if you’re married or in a common law partnership is a Spousal RRSP. How is a Spousal RRSP different from an individual or group RRSP? What are the benefits and limitations of a Spousal RRSP? How do you apply for a Spousal RRSP? Here is everything you need to know to get started on your Spousal RRSP. 

What is a Spousal RRSP?

In a Spousal RRSP, one partner is the contributor, while the other partner is the owner. The legal owner of the money in the RRSP would be the owner of the account. Usually, the higher-income spouse or partner would be the contributor so they can save more on taxes. Starting a Spousal RRSP with Innovation Wealth is a good move even if both partners have individual RRSPs as they offer certain key benefits to save on taxes during retirement. 

What are the benefits of a Spousal RRSP with Innovation Wealth?

The most important benefit is the savings you can earn on taxes, especially when there is a significant gap between the incomes of both partners. Here’s the breakdown of the tax-saving benefits of a Spousal RRSP: 

    Reduce your taxable income while employed: All your contributions towards your RRSP are not taxed, allowing you to enjoy a lower taxable income while working. This in turn means you could fall in a lower tax bracket or generally pay less in the form of taxes overall. 

    Reduce your taxable income when retired: A Spousal RRSP essentially allows the higher-earning partner to split their income in such a way that after retirement they could fall in a lower tax bracket and pay less taxes. For example, if you are the higher-earning partner and you contribute to a Spousal RRSP, the money in the RRSP will be noted as belonging to your partner. As they are earning lesser than you, that money will be taxed post-retirement based on their overall income, which would be lower than your overall income. Moreover, your overall income would also be lesser, which could potentially mean you fall in a lower tax bracket, allowing you to save on taxes. 

How much can I contribute to a Spousal RRSP with Innovation Wealth?

The amount you can contribute to an RRSP depends upon your individual RRSP limit. A common misconception is that if you have a group RRSP at work, you cannot also have an individual or Spousal RRSP. This is not true. You can have multiple types of RRSPs, as long as you contribute within your RRSP limit. For example, if your RRSP limit is $15,000, you could contribute $5,000 to your individual RRSP, $5,000 to your group RRSP and $5,000 to your Spousal RRSP.  Of course, it does not have to be the same amount in all accounts; you can split the amount any way that you deem fit. It’s important to split your investments and savings in such a way that you do not cross your limit. You can always speak about your Spousal RRSP with Innovation Wealth Advisors to ensure you’re splitting your contributions in the most optimal way. 

How long can I contribute to my Spousal RRSP?

You can contribute to your RRSP until the age of 71. Once you reach this age, your RRSP will need to be collapsed and transferred into an RRIF or Registered Retirement Income Fund. There are ways to save on taxes even after you transfer your RRSP to a RRIF so be sure to contact us for further guidance. 

When can you withdraw funds from an RRSP? What is the Spousal RRSP 3-year rule?

As an RRSP is a retirement savings plan, you should ideally plan to use the funds once you have retired. You may need the funds before retirement and could, in principle, withdraw the funds at any time. If you do, the withholding tax will be applied at the time of withdrawal. However, one critical rule our Wealth Specialists for Spousal RRSPs encourage investors to follow is to not withdraw funds for at least three years from the start of the RRSP.

The three-year rule set by the Canada Revenue Agency states that you cannot withdraw funds from a Spousal RRSP in the three calendar years after your first contribution. For example, if you started the RRSP on April 1, 2022, you should not withdraw the funds until April 1, 2025. If you do, both the contributor and the owner would face certain tax implications. What are these tax implications? All the contributions made by the contributor would be considered as income and they would be taxed on the amount. Anything that remains beyond the contributions (such as interest earned, or dividends received) would be taxed to the owner of the account. There is an exception to rule that is also important to note. The three-year rule does not apply to funds withdrawn in case one of the partners has passed away, if the partners are non-residents, or if the relationship has been terminated. 

Now that we’ve covered the most important aspects of a Spousal RRSP, all that’s left for you to do is to start a Spousal RRSP with Innovation Wealth so you can start saving on taxes right away. Of course, we highly recommend you speak to our wealth advisors who will help map out the best plans for you to save on taxes and grow your wealth. 

Can’t wait to start saving taxes with a Spousal RRSP? Get in touch with our Innovation Wealth Specialists for Spousal RRSPs today!

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*Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Unless otherwise stated, mutual fund securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions.

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