Couples looking to build a nest egg with the added perk of tax savings may want to consider a spousal registered retirement savings plan.
A spousal RRSP is effectively an “income-splitting” technique that allows married, or common-law partners, to reduce their taxes now and in their golden years. Experts say minimizing taxes in retirement is important because couples are typically living on a fixed income.
Spousal plans are optimal for partners who earn different levels of income. Thus, experts stress the product may not be the best retirement solution for every couple.
“The people who can make maximum advantage of it are in a situation where there is a substantial difference in incomes between the married or common-law partners,” said David Ablett, director of tax and retirement planning with Investors Group Inc. in Winnipeg.
Possible scenarios include couples where one spouse is a stay-at-home parent or where one partner plans to take time off from work for an extended period, possibly to pursue post-secondary studies.
It can also be used by couples in which one spouse is still working past age 71. Rules prevent that wage earner from contributing to his or her own RRSPs at that age. But if that breadwinner has a younger spouse, he or she can direct contributions to a spousal RRSP to glean tax savings.
Essentially, the product is geared toward spouses who have a significant difference in incomes or for those who expect to have such an earnings gap in the coming years.
“You want the higher-income spouse to be the contributor and the low-income spouse to be the annuitant or the owner of the RRSP,” explained Ablett.
This is how it works. The higher-income earner is designated the “contributing spouse” because he or she makes contributions to a spousal plan in the lower-income partner’s name. The spouse who receives the contributions is known as the “plan holder.”
Annual payments into a spousal RRSP are based on the contribution room of the higher-income spouse. That exact amount is outlined on the notice of assessment provided by the Canada Revenue Agency.
It is possible for a contributing spouse to sock money away in both his or her own RRSP and in a spousal plan, just as long as the combined payments remain within the contribution limit.
Just like a regular RRSP, payments into a spousal plan give the contributing spouse an immediate tax deduction.
Then during retirement, when the plan holder withdraws funds from a spousal plan, he or she is likely to be taxed at a lower rate — thereby reducing the couple’s combined tax burden.
The trick, according to experts, is ensuring the tax savings claimed by the contributing spouse are higher than the taxes paid by the plan holder during retirement.
“What you are trying to do, in effect, is attempt to equalize as much as possible the retirement incomes,” Ablett said.
However, “there are tax implications that you need to be aware of,” said Lee Anne Davies, head of advanced retirement strategies at Royal Bank of Canada. “With spousal RRSPs in general, there is a three-year time frame after a contribution is made when you need to be very clear on the attribution rules.”
An investment specialist can help steer a couple’s retirement plan so that they do not find themselves in breach of any rules, said Judy Thomson, director of sales at BMO Retail Investment.
Additionally, an expert can discuss other income-splitting techniques such as pension splitting and the splitting of CPP retirement benefits.
“Especially in this market, do yourselves a favour as a couple if you haven’t,” she said. “Because if you think about the stats, how many marriages break up over money … Think about this stuff, you’ve got to deal with it.”