The Canadian government offers plenty of incentives for long-term savers, including couples saving for retirement. Sure, both of you can still open your own individual Registered Retirement Savings Plans (RRSP). But if you are looking for a way to manage your tax bill as a couple, as well as build a bigger nest egg for your partner, spousal RRSPs can make a lot of sense. Here’s what you need to know about using this tool.What is a spousal RRSP?A spousal RRSP is a qualified retirement savings plan that you set up for your partner. You are able to make contributions to the RRSP, however, your spouse is the actual owner. The point of the spousal RRSP is to help you even out any gap in income between the two of you during retirement, while allowing you a tax break right now.So you can contribute to the RRSP and receive the tax deduction today. During retirement, your partner withdraws the money and pays the income tax that results from the withdrawal.Who would benefit from a spousal RRSP? Who wouldn’t?You’ll likely get the best results from a spousal RRSP if there is a large disparity in income between you and your partner. For example, a spousal RRSP can make sense if you work full-time, and your partner doesn’t or just works part-time. If you and your spouse have similar incomes, the spousal RRSP might not be as effective.Consider this scenario:You make $125,000 a year, and while your partner is the primary caregiver for the kids, he or she also works part-time and earns $35,000 a year. You each can contribute up to 18 per cent of your income to an RRSP. For you, that means $22,500, but for your spouse, that means they can only contribute $6,300.In an individual RRSP, this accumulates to a much smaller nest egg for your spouse overtime. It also leads to more taxes on your account down the road. As you begin to withdraw later, you will likely have to pay hefty taxes on those withdrawals, since you’ve invested so much.On the other hand, what if you divert some of that money into a spousal RRSP? It doesn’t change your contribution room – you can still only contribute a max of 18 per cent. However, it re-allocates some of that to your spouse. It equalizes your income in retirement, your partner gets a bigger nest egg, and you’ll be saving on tax when making withdrawals, since your spouse will be the one claiming that income from the spousal RRSP, putting you in a lower tax bracket.Things to know about the spousal RRSPBefore you decide to spread the love and wealth with a spousal RRSP, you should note a few things first:Remember that your spouse owns the RRSP. While you are making contributions, they become his or hers once in the account. Your partner makes the investment decisions related to the account, and decides when to withdraw.You can open a spousal RRSP for your common law partner, the same way you would for your husband or wife.Spousal RRSPs have a three-year attribution rule. If your spouse withdraws money from the RRSP within three calendar years of the last contribution, you will be taxed for it. It’s important that you and your spouse are on the same page and discuss the repercussions before any withdrawals are made.If your spouse is younger than you, the spousal RRSP can be a great tool since you can make contributions until the end of the year in which he or she turns 71. So, even if you are over 71, you can still contribute to a spousal RRSP.Carefully consider your options before moving forward with a spousal RRSP. It could possibly save you a lot, but as with all things investing and personal finance, the best tools for you depend on your individual situation. Of course, one great option is to consult with a retirement specialist and put together a plan that allows you to maximize your joint income in retirement while minimizing your taxes.This post has been updated….(read more)

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As couples navigate their financial journey together, many may consider opening a spousal Registered Retirement Savings Plan (RRSP). This can offer a number of advantages, but there are also some potential downsides to consider.

First, it’s important to understand what a spousal RRSP is. In short, it’s an RRSP account that is set up in the name of one spouse (the contributor) but is intended for the benefit of the other spouse (the annuitant). The contributor makes deposits into the account, and those contributions are tax-deductible for the contributor. When the annuitant withdraws the funds in retirement, they will be taxed at the annuitant’s lower tax rate.

So, why might someone want to open a spousal RRSP? The biggest advantage is the ability to split income in retirement. Since the annuitant will be taxed on the funds in retirement, if the spouse in retirement has little to no other income, they may be in a lower tax bracket and pay less tax on the withdrawals. This can result in substantial tax savings over time.

Another advantage of a spousal RRSP is that it allows for a higher contribution limit. If one spouse has reached their contribution limit, the other spouse can make contributions to the spousal RRSP on their behalf, thereby effectively doubling the couple’s retirement savings potential.

However, there are also some potential pitfalls to consider. First and foremost, a spousal RRSP should only be opened if the couple plans to stay together. In the event of a divorce or separation, the funds in the spousal RRSP will be legally considered the property of the annuitant and will not be split equally between spouses.

Another concern is that the contributions made to a spousal RRSP are subject to the spousal attribution rule. This rule stipulates that if a spouse contributes to a spousal RRSP and then withdraws those funds within a certain time period (usually one year), the income earned on those funds will be attributed back to the contributor and taxed at their higher tax rate. This means that if the contributor is already in a high tax bracket, they may not see the full tax benefit of contributing to the spousal RRSP.

Ultimately, whether or not to open a spousal RRSP is a decision that each couple should make based on their unique situation. Consulting with a financial advisor can help ensure that this decision is made with all the necessary information in mind.