# Spousal RRSPs - How do they work?



## Irontoast (Oct 13, 2010)

I am looking for some advice on spousal RRSPs.

I made 70k in 2010. Will probably push 80k+ this year; which will put me into the next tax bracket. My wife makes 36k. We are planning to have babies in the near future, and she wants to stay at home for a few years to raise them when we do.

I am currently investing $500 a month into my RRSPs, and wifey: $300 into hers.

From what I read so far it would make sense for us because we would get a bigger refund. 
So how does one go about converting their RRSP spousal ? 
Do they both need to be converted to spousal status, or just hers ?


----------



## OhGreatGuru (May 24, 2009)

Irontoast said:


> ...
> I am currently investing $500 a month into my RRSPs, and wifey: $300 into hers.
> 
> From what I read so far it would make sense for us because we would get a bigger refund.
> ...


Please see this thread: http://www.canadianmoneyforum.com/showthread.php?t=5875

You cannot "convert" your RRSP to a spousal RRSP. All you can do at this stage is open a new spousal RRSP, and contibute to it instead of to your own RRSP. The amount that you can contribute is governed by your RRSP room, just as if you were contributing to your own RRSP, and you deduct the contributions from your income in the same way. But the annuitant and owner of the spousal RRSP is your spouse. There is one significant difference between a spousal and regular RRSP - any withdrawals made within 3 years of last contribution will be attributed back to you (the contributor) for tax purposes. But otherwise future withdrawals will be taxed in the hands of your spouse.

(Please note there is a difference between "Spousal RRSP" and "an RRSP owned by my spouse")

It is possible for your spouse to combine her personal RRSP and the spousal RRSP in one account, but for reasons discussed on other threads it it better not to do so. It becomes too complicated to track what contributions are subject to the 3-year rule.

You won't get any bigger refund unless you contribute more money than you are currently contributing to your own RRSP. But the spousal RRSP is a way of distributing future retirement income to the lower-income spouse.


----------



## MoneyGal (Apr 24, 2009)

Congratulations on your plan, and for planning for your future! I stayed home when my kids were small and it was totally the right decision for me and our family.


----------



## I'm Howard (Oct 13, 2010)

Individuals such as Teachers or Union members with Indexed DB Plans are better off not to contribute to an RRSP, you are probably deferring paying Income Taxes into a higher income bracket. 

TFSA's are a better way to go, plus today's low mortgage rates are an excellent opportunity to dump debt.


----------



## HaroldCrump (Jun 10, 2009)

Regarding spousal RRSPs, I wonder whether they are still relevant under the new post-retirement income splitting rules that allow spouses to split RRIF withdrawals/income similar to pension incomes.

If we assume that the govt. does not renege the RRSP income splitting rules in the future, are spousal RRSPs still relevant?


----------



## Four Pillars (Apr 5, 2009)

HaroldCrump said:


> Regarding spousal RRSPs, I wonder whether they are still relevant under the new post-retirement income splitting rules that allow spouses to split RRIF withdrawals/income similar to pension incomes.
> 
> If we assume that the govt. does not renege the RRSP income splitting rules in the future, are spousal RRSPs still relevant?


I think they are - pension splitting rules only apply when you are 65 or older. Spousal RRSPs are still beneficial for scenarios involving younger people.


----------



## HaroldCrump (Jun 10, 2009)

Four Pillars said:


> I think they are - pension splitting rules only apply when you are 65 or older. Spousal RRSPs are still beneficial for scenarios involving younger people.


You mean retiring early (i.e. prior to 65) and collapsing the RRSP (both self and spousal)?
How does spousal plan help the contributor in this case?
Can the contributor not withdraw the same amount from his/her own RRSP instead of both withdrawing equal amounts?
Is it only because of slightly lower tax rates on two incomes vs. one?


----------



## Four Pillars (Apr 5, 2009)

HaroldCrump said:


> You mean retiring early (i.e. prior to 65) and collapsing the RRSP (both self and spousal)?
> How does spousal plan help the contributor in this case?
> Can the contributor not withdraw the same amount from his/her own RRSP instead of both withdrawing equal amounts?
> Is it only because of slightly lower tax rates on two incomes vs. one?


Yes - retiring early (pre-65). 

There is no collapse of the RRSP - just making withdrawals.

The tax rates on two incomes is a significantly lower than one. It is well worth doing a spousal RRSP, if it will even out the incomes prior to age 65.

At taxtips.ca, I entered 1 person at $60k 'other' income in Ontario - tax payable is $10,952. This assumes the other spouse's income is zero.

2 people at $30k each is $8,612 for a difference of $2,340 taxes saved per year.


----------



## OhGreatGuru (May 24, 2009)

HaroldCrump said:


> You mean retiring early (i.e. prior to 65) and collapsing the RRSP (both self and spousal)?
> How does spousal plan help the contributor in this case?
> Can the contributor not withdraw the same amount from his/her own RRSP instead of both withdrawing equal amounts?
> Is it only because of slightly lower tax rates on two incomes vs. one?


RRIF payments and RRSP Annuity payments made prior to age 65 are not eligible for pension-splitting. Whereas RRIF payments or RRSP annuity payments from a spousal RRSP will be taxable in the hands of the spouse regardless of age. There is no age restriction on splitting true pensions like DB pensions. It's just one of those arbitrary rules that doesn't recognize how many people retire before 65. Maybe the government figured that most of the people who can afford to retire early must have other pension income they can split.

Another peculiarity in our tax laws - If you are in receipt of a pension, that income is eligible for the $2k pension credit regardless of age. But if you receive RRIF or RRSP annuity income, that is eligible for the Pension Credit only after age 65. People who build their own "Pension plan" with RRSPs should start a class action to remove this inequity.


----------



## jmalias (Aug 10, 2010)

Irontoast said:


> I am looking for some advice on spousal RRSPs.
> 
> I made 70k in 2010. Will probably push 80k+ this year; which will put me into the next tax bracket. My wife makes 36k. We are planning to have babies in the near future, and she wants to stay at home for a few years to raise them when we do.
> 
> ...


Yeh!! I get to put in my 2 cents.

We are/were in similar financial boats.
Have your wife stop putting any money in her RRSP.
Anyone making less than 37k should avoid RRSP if there are different avenues available. <personal opinion>
Max. your spousal RRSP first. But stop contributing once your are close to baby time. No contributions for a few calendar years and the lower income spouse can withdraw funds at a lower tax rate. Will not effect EI as it does not have to claimed as income on the 
Use this time to top up your TFSA and prepare to max your spousal RRSP the very next calendar year after the funds are withdrawn.

Rinse and repeat.

I am doing similar to ensure my wife's income is 37k each year.
We are past babies now, so RRSP taken out go directly into dividend generating stock in my wife's account. Once the spousal RRSPs are depleted, I will max out again, wait a few calendar years, and slowly build her non reg. portfolio.

Like any good financial plan, slow and steady wins the race.
20% taxes on up to 37k
over 43% when you make over 82k
over 46% when you make over 127k
In my case once I retire and split pension, my wife will never be in the lowest tax bracket ever again. So now is the best time to withdraw funds out of the shelter.

Every situation is different.


----------

