Use Spousal RRSPs to Save Tax - Year after Year

Do you and your spouse expect to be in different tax brackets in retirement? If so, a spousal RRSP can help you create extra cash flow during your golden years.

A spousal RRSP is one that allows a married or common law spouse to use their available RRSP room to make RRSP contributions for the other spouse and claim the tax deduction. The idea is to minimize the retirement assets and income of the spouse expected to be in the higher tax bracket in retirement, while building up the nest egg of the other. In this way, it helps couples equalize their income in retirement and reduce their overall taxes.

In the example below, you can see that by shifting assets that produce $30,000 of income from the higher earner to the other, this couple saves about $3,743 in retirement. Not just once, but year after year! In addition, it could reduce the clawback on Old Age Security payments for the higher earner.

Usually, the person contributing to the spousal RRSP will be the current higher earner, but not always. As an example, a teacher may earn less than their spouse during the working years, but expect a higher pension in retirement.

A few words of caution. The government has rules to discourage couples from using spousal RRSPs to split income in the short term. Any withdrawals made within three calendar years of the last contribution will be taxed back to the contributor. Note also that once assets are invested in a spousal RRSP, they will be owned and controlled by that spouse.

Spousal RRSPs are a wonderful way for couples to maximize their after-tax income in the future. The earlier you begin, the greater the annual tax savings you can potentially achieve. Call us today to get started.