Spousal Registered Retirement Savings Plans (RRSPs) are a popular way for couples in Canada to minimize their taxes and maximize their retirement savings. A spousal RRSP is a type of RRSP that is set up and owned by one spouse, but the contributions are made by the other spouse. This allows for income splitting, which can help reduce the overall tax burden for the couple.
When one spouse has a higher income than the other, it makes sense for them to contribute to a spousal RRSP in their partner’s name. This will lower the overall tax bill for the couple, as the spouse with the lower income will be taxed on the withdrawals at a lower rate. In addition, the higher-income spouse will also receive a tax deduction for the contributions made to the spousal RRSP.
To set it up, the first step is for the couple to decide which spouse will be the owner of the plan. The owner of the plan must have a valid Social Insurance Number (SIN) and be a resident of Canada. The other spouse will be the contributor.
Once the owner of the plan is determined, the couple can open an account at any financial institution such as a bank or a credit union. The contributor will then make contributions to the plan, and the funds will be invested in the same way as in a regular RRSP. The contributor can claim a tax deduction for the contributions on their tax return, but the owner of the plan will be taxed on the withdrawals.
It is critical to note that there are contribution limits for spousal RRSPs, just as there are for regular RRSPs. The contribution limit for the 2021 tax year is 18% of earned income or $27,830, whichever is lower. Contributions in excess of this amount will be subject to a 1% per month penalty tax.
Another important consideration when using a spousal RRSP is the “attribution rule.” This rule states that if the contributor withdraws funds from the plan within three years of making the contribution, the withdrawn amount will be attributed back to the contributor and taxed at their marginal tax rate. To avoid this, it is important for the couple to plan ahead and ensure that the funds will not be withdrawn for at least three years.
There are many benefits to using a spousal RRSP to minimize taxes in Canada. By contributing to a plan in your spouse’s name, you can lower your overall tax bill and maximize your retirement savings. It is important to be aware of the contribution limits and the attribution rule when using a spousal RRSP and to plan ahead to ensure that the funds will not be withdrawn for at least three years.
Overall, spousal RRSPs can be a powerful tool for couples looking to minimize their taxes and maximize their retirement savings. It’s essential to consult with a financial advisor to find out the best way to use spousal RRSPs to fit their financial needs and goals. With proper planning and execution, a spousal RRSP can help couples achieve financial security and peace of mind in their retirement years.