The rules of a spousal contribution apply to spouses and common-law partners. The contributions made to a spouse’s RRSP reduce the limit on the individual’s contributions. This means that the contribution limit is combined when an individual contributes into multiple RRSPs. The amount contributed into the combined RRSPs cannot exceed the individual’s RRSP contribution limit. The individual’s contribution limit is noted on the previous years notice of assessment. The spouse’s contribution limit is not affected by contributions from the individual.
There are many advantages of spousal RRSP contributions, including no age limits, income balancing and certain event withdrawals. The age limit to contribute to a RRSP is the end of the year in which the individual turns 71.
If the individual is over the age limit to contribute to their own RRSP they may still contribute to their spouse’s RRSP if the spouse has not reached the retirement age limit. The second advantage to spousal contributions is income balancing. In Canada, if the couple makes similar incomes there are more tax breaks available.
Spousal contributions is one way to balance a couple’s income in retirement; this means that the higher paid individual in the household can contribute to the lower earner’s RRSP and the higher earner will earn a tax break in that year.
If during retirement, one spouse has a large amount in their RRSP and the other spouse has very little, the spouse with the larger income will pay higher taxes. This is a way to avoid those taxes.
If the RRSPs are balanced then the two spouses can take out the same income divided over two people and they will be taxed less than if the one spouse takes the amount out as a larger income. It may also be useful if the RRSP of the spouse that will be retiring earlier is larger as he will be retired longer. Recently, there have been changes to pension income-splitting rules; however, the spousal RRSP may still be a benefit to some individuals.
The final advantage is realized if a large withdrawal is needed for such things as the first time homebuyers plan or post secondary education: the money can be taken out of both the individual’s RRSP and the spousal RRSP, effectively doubling the withdrawal limit.
The spousal RRSP encourages couples to look at the extra retirement income gained. With the income spread between the two individuals , they may be placed into a lower tax bracket and taxed less.