How does a spousal RRSP work?

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

Gena Katz 2 March, 2003 | 2:00PM
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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 will be particularly relevant where there is only one working spouse in a family or there is 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 or from other income splitting techniques. 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 Nancy earns $75,000 annually while her spouse Robert, who is the primary caregiver for the children, earns approximately $15,000 as a self-employed editor. Based on these earning figures, Nancy can contribute $13,500 to an RRSP while Robert can only contribute $2,700. In addition, because Nancy's marginal tax rate is significantly higher than Robert's (say 36% versus 22%), on a dollar-for-dollar basis, she gets a greater tax benefit from her RRSP contribution.

The family has decided to contribute $13,500 annually to RRSPs. If Nancy makes the contributions and deposits half to her plan and half to a spousal plan, the family gets the benefit of relatively high rate 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  

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