To split or not to split – Spousal RSPs have advantages worth considering

If you are single, the tax system offers you limited ways to lower your income. You can contribute to an RRSP for a possible tax refund; you can save and invest in a Tax Free Savings Account to build up non-taxable wealth. After age 65 as a single, you may qualify for the age credit and the pension tax credit. However, if you are in a relationship, you have more opportunities to reduce taxes by splitting income and maximizing the credits available; even transferring unused ones to your partner. Another option you should seriously consider is the Spousal RRSP to build up more tax-efficient retirement income as a couple..

The Spousal RRSP is a plan for retirement savings set up for your partner. The amount you may contribute to it each year depends on your taxable income, not that of your partner. Thus if you are the higher earning of the couple, it allows you to balance the savings in the two retirement accounts, yours and your partner’s. As a result, once retired, you will be withdrawing and paying tax on lower amounts than if most or all of the savings were in your own RRSP.

Let’s take the example of a couple named Marie and Jo. Marie is a dentist earning $125,000 per year and Jo works part-time earning $25,000 per year. The contribution limit for each of them is 18% of the previous year’s earned income: $22,500 for you and $4,500 for Jo. If they only have individual RRSP’s Marie’s will accumulate far more than Jo’s. When they retire, the withdrawal from Marie’s account will be much higher, and could contribute to pushing her into a higher tax bracket. 

Here’s an alternative plan using the Spousal RSP: suppose Jo contributes $4500 each year to her own RSP, and Marie contributes $9,000 each year to a Spousal RRSP instead of contributing all $22,500 to her own; at the end of 30 years, they will have accumulated the same amount in retirement plans. At age 72, minimum withdrawals from the RRIF’s will be equal and each of the partners is more likely to be in the same lower tax bracket.

Another benefit of a Spousal RSP belonging to a partner younger than you is that it allows you to continue contributing to an RSP after age 71 when you can no longer contribute to your own RSP. If you have contribution room, you can put that amount into the spousal RSP and take the deduction on your own income.

Income splitting on the tax return is available when there is retirement income; however, there is still a big advantage to the Spousal RSP, as tax laws change from time to time. While I don’t anticipate an end to income splitting, we can’t deny the possibility when governments change; setting up a Spousal RSP as part of retirement planning guards against any danger of that.

Contact me if you would like to know more about Spousal RRSP’s. Some things you should know when considering this option are:

1. The Spousal RSP belongs to the spouse even though you contribute to it.
2. Attribution rules: Withdrawals from Spousal plan will be attributed back to the contributing spouse if withdrawn within three calendar years of the contribution. Should that happen, the amount withdrawn will be taxed in the hands of the contributing spouse at the higher rate of personal tax.

Couples, whether married or common-law, have tax advantages that singles do not. It pays to know what they are and work with a Financial Advisor to use them to the max.

It’s just good advice.

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