In this short video, we’ll explain “what is a Spousal RRSP” and what are its benefits?

A spousal RRSP is a tax-advantaged account in Canada that allows you to contribute money to your spouse or common-law partner’s registered retirement savings plan, up to your personal contribution limit.

When a contribution is made to the spousal RRSP, the contributor receives a tax deduction. This can help the contributor, you, to balance your income as a couple and works best when a large disparity exists between you and your spouse’s income.

By contributing to a Spousal RRSP, the higher-earning spouse receives a tax deduction that could lower their personal tax bill for the year.

On the other hand, the lower-earning spouse should get taxed at a lower marginal tax rate when the money is withdrawn from the Spousal RRSP. This means potentially paying less tax on your Spousal RRSP assets at retirement.

Watch our next video for an example on how you can take advantage of a Spousal RRSP to lower your taxes.

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What are the advantages of a Spousal RRSP in Canada?

When it comes to preparing for retirement, Canadians have several options to choose from. One of the most popular retirement savings vehicles in the country is the Registered Retirement Savings Plan (RRSP). While the benefits of contributing to an RRSP are well-known, a lesser-known variant of this plan is the Spousal RRSP, which offers several advantages in the long run.

In simple terms, a Spousal RRSP is a retirement savings plan that allows one spouse or common-law partner to contribute to the RRSP of their spouse or partner. The contribution is made using the contributing spouse’s RRSP contribution room and is deducted from their taxable income. The funds in the Spousal RRSP then belong to the receiving spouse, providing them with a source of retirement income down the road.

So, what are the advantages of a Spousal RRSP in Canada?

Income splitting: One of the key benefits of a Spousal RRSP is the ability to split income during retirement. When the time comes to withdraw funds from an RRSP, the contributing spouse may find themselves in a higher tax bracket. By contributing to a Spousal RRSP, the couple can reduce their overall tax burden by ensuring that each spouse has an equal amount of retirement income. This strategy allows for income splitting, potentially resulting in significant tax savings.

Equalizing retirement income: In some cases, one spouse may have a higher income and therefore contribute more towards their own RRSP. However, when it comes time to retire, having an unbalanced retirement income can lead to discrepancies in the standard of living between partners. By contributing to a Spousal RRSP, the higher-earning spouse can help equalize their retirement income with that of their lower-earning partner, ensuring a more equitable retirement for both.

Pension income splitting: Many couples in Canada include one partner who may have a pension plan through employment, while the other does not. A Spousal RRSP can help balance out income disparities by allowing the partner without a pension to benefit from the pension income splitting strategy. By contributing to the Spousal RRSP, the couple can tap into the lower-earning partner’s RRSP during retirement, providing additional retirement income and potentially reducing the amount of tax owed on the pension income.

Cohabitating but not married: Spousal RRSPs are not limited to married couples; they are available to common-law partners as well. In Canada, common-law partners who have lived together for at least one year are legally considered spouses when it comes to tax and retirement planning. This means that common-law partners can also take advantage of the spousal contribution rules and reap the benefits of a Spousal RRSP.

Flexibility in withdrawals: Similar to regular RRSPs, Spousal RRSPs allow for flexible withdrawals. The receiving spouse can withdraw funds from their Spousal RRSP at any time as long as they meet the Canadian tax rules governing RRSP withdrawals. This flexibility allows for financial planning strategies that can optimize the couple’s overall tax position in retirement.

In conclusion, a Spousal RRSP is a powerful retirement savings tool with numerous advantages for couples in Canada. From income splitting and equalizing retirement income to taking advantage of pension income splitting and benefiting common-law partners, the Spousal RRSP provides flexibility, tax savings, and overall financial security for both partners. Consulting with a financial advisor or tax professional is recommended to fully understand the specific advantages and best strategies for utilizing a Spousal RRSP.