Spousal RRSP's

Another advantage of the RRSP is that you have the option to use a spousal RRSP. This has two major advantages if you and your spouse or common-law partner have a fair sized wage gap between the two of you: deferring more taxes, and potentially lowering tax rates in retirement.

 

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How it works

A spousal RRSP is registered under the lower income spouse and the plan belongs to them. It uses the contribution room of the contributing spouse, they control the investments and they are the only ones able to withdraw from the account. Spousal contributions have a 3-year attribution period where if the contribution is withdrawn, the income will be attributed back to the contributing spouse.

The RRSP functions by the higher income spouse contributing to the spousal RRSP. This income is deductible from their taxes just as if they contributed to their own RRSP.

What are the advantages?

As previously mentioned, you are able to defer more taxes and potentially lower tax rates in retirement.

Deferring more taxes – Assuming in your marriage or common-law relationship that all money is split between the two of you, if there is an income gap between in the relationship, there is likely also an income tax bracket gap. If the lower income spouse is taxed at a marginal tax rate of 25%, and the higher earning spouse is taxed at a marginal rate of 40%, you will defer 15% more taxes through a spousal contribution than a regular contribution by the lower income spouse.

Lower tax rates in retirement – If a couples retirement accounts are very unequal, the withdrawals will also likely be unequal. If a couple has a combined withdrawal rate of $100,000, they will pay higher taxes if the withdrawal ratio is 70% from the higher income spouse and 30% from the lower income spouse. Using the spousal RRSP to balance portfolio sizes, you can achieve closer to 50/50 and overall pay less taxes for withdrawing the same amount of money.