Spousal RRSPs: Contribution and Withdrawal Rules

Many Canadians use a registered retirement savings plan, or RRSP, to save for retirement. A spousal RRSP: a similar version of this registered account designed for married couples and common-law partners. Depending on the couple’s financial situation, a spousal RRSP can have a huge impact on their shared tax burden.

What is a spousal RRSP?

A spousal RRSP is a retirement savings account that is owned by one person (the annuitant or plan holder) but holds funds that are contributed by their spouse or common-law partner (the contributor).

Spousal RRSPs are particularly advantageous for couples where one partner is likely to be in a higher tax bracket than the other when they retire.

For example, let’s say one spouse is a high-income earner and contributes regularly to their RRSP, while the other is a stay-at-home parent. This could create a situation in which the first partner has a significant amount saved in their RRSP but pays a higher income tax rate, whereas the partner who stayed home might be at a lower tax rate, but have a limited amount in their RRSP.

With a spousal RRSP, the couple could contribute toward retirement savings in a more balanced manner. That could lead to lower combined taxes when they start withdrawing funds in their retirement years.

How spousal RRSPs work

Most major financial institutions offer spousal RRSPs for couples.

Even though the contributor provides the funds, the annuitant owns the account and makes the investment decisions. They’re also the only person allowed to withdraw money from the account.

Contributions to a spousal RRSP count towards the contributor’s RRSP tax deduction limit, and don’t affect the annuitant’s deduction limit. Avoid over-contributing to your RRSPs or you’ll face penalties.

Spousal RRSP vs. personal RRSP

A personal RRSP and spousal RRSP are two different accounts. You can have both, whether you’re the contributor or the annuitant. For example, if you’re the higher-earning spouse, you can have your own personal RRSP and contribute to a spousal RRSP for your partner, who can also have their own separate personal RRSP. Your different RRSP accounts can even be at different financial institutions.

However, know you have only one pot of RRSP contribution room based on the income you earned in the previous year. You can allocate that contribution room however you’d like between the two accounts.

For example, if you have $10,000 of RRSP contribution room, you could contribute $5,000 to each plan or contribute different amounts, as long as they don’t add up to more than $10,000.

Spousal RRSP contribution rules

Spousal contribution limits are determined by the contributor’s overall limit. Opening a spousal RRSP does not give you additional contribution room.

RRSP contribution room is based on 18% of your previous year’s earned income, up to $29,210 for 2022. Any unused contribution room gets carried forward to future years.

Spousal RRSP withdrawal rules

A spousal RRSP must be converted to an registered retirement income fund, or RRIF, by Dec. 31 of the year the annuitant turns 71. The annuitant would then have to withdraw a minimum amount based on their age, which would be taxed at their marginal tax rate.

Early withdrawals from a spousal RRSP are allowed, but a three-year attribution rule applies. That means you have to wait the remainder of the calendar year plus two full years, without making any contributions, before withdrawing funds. If the annuitant withdraws funds before that time has passed, it will be taxed as part of the contributor’s income.

Let’s say you made a spousal RRSP contribution in November 2020. You’d have to wait until 2023 to make any withdrawals if you want the funds to be taxed in your spouse’s name. If you made any contributions in 2021 or 2022, the clock would reset and you’d start the three-year wait again.

Contributors are not required to claim their spouse’s withdrawals as income in the following situations:

• Withdrawals are made after the relationship ends.
• You’re not a resident of Canada.
• The money is used for the Lifelong Learning Plan.
• The contributor dies in the year of the withdrawal.

Spousal RRSPs can be complicated. If you think one might be useful for you, it’s a good idea to speak with a financial professional who can explain how the benefits and drawbacks may apply to your situation.

Benefits and drawbacks of a spousal RRSP

Like any retirement savings strategy, contributing to a spousal RRSP comes with advantages and disadvantages.

Benefits of a spousal RRSP

• Immediate tax deduction. Contributions made to a spousal RRSP give the contributor an immediate tax break, lowering their taxable income.
• Potential future tax break. When it’s time to withdraw funds from the accounts in retirement, splitting income between members of a couple could mean a lower tax bill overall.
• Home Buyers’ Plan. First-time homebuyers can borrow up to $35,000 from their RRSPs as part of the Home Buyers’ Plan. A spousal RRSP would allow couples to access up to $70,000.
• Continued contributions. Taxpayers can’t contribute to their own RRSPs after Dec. 31 of the year in which they turn 71. However, they can continue to contribute to the spousal RRSP if their spouse is younger than 71 and they have contribution room available.

Drawbacks of a spousal RRSP

• Three-year attribution rule. Spousal RRSP contributions must stay in the account for the remainder of the calendar year plus two more years before they can be withdrawn as the annuitant’s taxable income. If money is withdrawn within three years, it will be included in the contributor’s taxable income. Plus, the three-year timing applies to the most recent contribution, not the first one. However, this rule does not apply to Home Buyer’s Plan withdrawals, which can be made within three years of a contribution.
• Can be complicated if the relationship breaks down. Even though the annuitant owns the account, the contributor may seek out an equalization payment to even things out. However, it’s important to seek professional advice from a financial advisor to help you navigate this complex process.

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