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Spousal RRSPs can offer tax benefits, but experts say it might not work for everyone

Financial planner says there can be advantages if there is an age difference with the couple
RBC financial planner Aba Quarshie is pictured in Ottawa on Thursday, Feb. 2, 2023. THE CANADIAN PRESS/Sean Kilpatrick

Canadian couples looking to save money in retirement may turn to spousal RRSP accounts, though financial experts caution it might not work for everyone.

Aba Quarshie, a financial planner at RBC in Almonte, Ont., said in order for a couple to benefit from a spousal RRSP there generally need to be differences between the partners.

“We are looking for imbalances in incomes and also perhaps imbalances in age, so that’s usually where we see the greatest benefit,” she said.

“It’s not for everybody. What is good for your neighbour might not necessarily be good for you.”

Spousal RRSPs are available to married and common-law couples, who can use the savings vehicle to help even out income levels in retirement and reduce the total amount of taxes that you both may owe.

In a spousal RRSP, one partner makes a contribution to an account in their spouse’s name while receiving the tax deduction on their own return. The contribution amount is limited by your RRSP contribution room. The contributions do not affect your spouse’s contribution limit to their plan.

Advisers say typically, a higher income spouse makes a contribution to a spousal RRSP belonging to a partner in a lower tax bracket.

Quarshie said there can be advantages if there is an age difference between the couple.

While you cannot make RRSP contributions after the end of the year in which you turn 71, if you have a younger spouse and unused contribution room you can contribute to a spousal RRSP until the end of the year that your spouse turns 71.

“You are able to make contributions to their spousal RRSP using your unused room and getting the deduction against your income, but then the future income belongs to the spouse,” Quarshie said.

Prospective homeowners may want to consider the option as well.

Jessie Sidhu, HSBC Bank Canada’s head of branch network for the B.C. region, said having more money in two separate RRSP accounts may also be helpful if you are looking to take advantage of the homebuyers plan to help fund a down payment.

“For first-time homebuyers, each individual is able to borrow up to $35,000 from their RRSPs as part of the homebuyers’ plan for a down payment. A spousal RRSP would allow these couples to access up to $70,000 from their RRSPs to purchase their first home,” Sidhu said.

Quarshie also noted that if one spouse dies with RRSP contribution room left, money can be put into a spousal RRSP for the surviving spouse. She said this ability has the benefit of reducing the deceased’s final tax bill, which is often a substantial amount.

“It’s something that we often look for when we are dealing with clients that have lost a spouse,” she said.

In the case of a divorce or separation, spousal RRSPs are treated the same as other assets. Sidhu said this can present a challenge, as there can often be a significant financial strain during a separation.

“As these are case-by-case situations, the couple should seek the advice of their lawyer and accountant for support,” she said.

There are also noteworthy restrictions to withdrawals from spousal RRSP accounts.

If you put money into a spousal RRSP and your spouse takes that money out, either during the year you made the contribution or in the following two years, you will have to pay the tax on the money at your tax rate.

“You’d always want to consult with any of your financial experts before you try and make withdrawals or implement the spousal RRSP,” Quarshie said.

This report by The Canadian Press was first published Feb. 16, 2023.

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Craig Wong, The Canadian Press