How does a spousal RRSP work?

Gena Katz, a chartered accountant and principal with Ernst and Young, has the answer.

Gena Katz 15 December, 2003 | 2:00PM

Dear Expert:

I am 42 years old and my annual income is about $52,000. My wife's annual income is $50,000. I have heard about a spousal RRSP, but I am not sure if I should open one for my wife?

Expert Answer:

A spousal RRSP is simply one where contributions are made by one spouse for the benefit of an annuitant who is the other spouse. The spouse that makes the contributions is eligible for the RRSP deduction (based on his or her contribution limit) and the annuitant spouse will include the RRSP proceeds in his/her income when amounts are paid out of the plan. One of the benefits of using a spousal RRSP is income splitting -- equalizing spouses' retirement income, thus taking advantage of two sets of lower marginal tax rates. This is particularly relevant where there is only one working spouse or a large discrepancy in earnings between two spouses.

In your case, your incomes are almost the same, so if the status quo were to prevail until retirement, then there would appear to be little benefit to having a spousal RRSP. However, if it seems likely that one of you might have a lower income than the other in the future, it might make sense to have a spousal RRSP. For example, if you are planning to take early retirement and your wife plans to keep working to normal retirement age, then she might consider contributing to a spousal plan in your name.

Here's how a spousal RRSP can benefit a couple with a significant income gap. Say you earn $95,000 annually while your wife, who is the primary caregiver for the children, earns approximately $15,000 as self-employment income. Based on these earning figures, you can contribute $17,100 to an RRSP (your earnings multiplied by 18%) while your wife can only contribute $2,700. In addition, because your marginal tax rate is significantly higher than that of your wife (say, 40% versus 22%), on a dollar-for-dollar basis, you get a greater tax benefit from your RRSP contribution.

Say the family has decided to contribute $15,000 annually to RRSPs. If you make the contributions and deposit half to your plan and half to a spousal plan, the family gets the benefit of a relatively high rate of tax deductions in respect of the contributions and likely reduced taxes on total retirement income, as funds are withdrawn in future years. Based on today's tax rates, the annual tax savings in having two spouses each earn $40,000 of retirement income annually compared with one spouse earning $80,000 is approximately $5,000.

To find out how much an RRSP contribution may save you, try Morningstar's RRSP Calculator.

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Gena Katz

Gena Katz