Money123 Article: Spousal RRSPs As An Effective Income Splitting Strategy

How to save tax after you retire using a spousal RRSP. Try this!

As a financial planner for Global News’ Money123 online email newsletter, I answer reader questions about investing, managing your finances, and planning for your future.

In the latest email that went out to subscribers, I answered a question about why & how to use Spousal RRSPs and how it can be an effective income splitting strategy.

By the way, my answer is at the bottom of the email newsletter.

Here’s a link to the Global News Money 123 email newsletter with what I recommend: https://globalnews.ca/newsletter/9919545/

The Question:

“My common-law spouse made a deposit to a spousal RRSP in my name in December 2021. I have contacted CRA and a financial advisor to see when I can withdraw money and it not be applied to my spouse’s income. Both had a different answer, and I am getting conflicting responses. I understand it is three years, so would I be able to take money out Jan. 2024 and have it applied to my income?”

— A Money123 reader 

Ed’s Answer:

“Spousal RRSPs can be an effective income splitting strategy, but most Canadians don’t understand them. A spousal RRSP is separate from your RRSP and your spouse’s. It is in your spouse’s name, but you are the contributor. This means you can contribute using your RRSP room to a spousal RRSP in your spouse’s name. Or your spouse can contribute using their RRSP to a spousal RRSP in your name.

Why would you do that? It might save you tax after you retire. You pay less tax after you retire if you and your spouse have similar taxable incomes. Your taxable incomes at that point will be your government & employer pensions, withdrawals from your RRSPs (converted to RRIFs after you retire), and any investment or work income, if you still work.

If it looks like your taxable income after you retire will be noticeably higher than your spouse’s, you can try to even them out by putting more into RRSPs in their name. You can contribute to a spousal RRSP in their name, while they contribute to their own RRSP. With effective planning, you can have retirement incomes that are closer to even.

To prevent short-term uses, the rules require that any contribution to a spousal RRSP stay in for the year it is contributed plus at least two more years. If you withdraw sooner, then the withdrawal is taxable to you, the contributor. If you leave it in long enough, withdrawals are taxed to your spouse, the owner of the RRSP.

The rules often say ‘three years,’ but it’s not actually three years. In your case, you contributed in 2021, so it is the rest of 2021 plus two full years. So you can withdraw it in January 2024 or later and the withdrawal is taxed to your spouse.”

Ed