Spousal or Partner RRSP’s – What are they and how do they work?
If you’ve been planning for retirement, RRSP’s have probably crossed your mind more than once. Opening an RRSP is a great way to save your money with diversified investments while protecting your investment growth with benefits like tax deferrals and tax credits for as long as the RRSP account is open. During your planning, you’ve also likely thought about a financial strategy for your spouse. How can you both ensure a secure financial future during retirement, especially if one partner earns more than the other during your working years? This is where a spousal RRSP often provides advantages to your long-term retirement goals that an individual RRSP may not.
What’s the difference between an individual and spousal RRSP?
Individual and spousal RRSPs operate in the same manner; you open an investment account and contribute savings to it in order to grow your wealth. This account holds diversified investment types, benefits from tax deferrals and tax deductions, and is registered with the Canadian Government. The biggest difference in an individual RRSP compared to a spousal RRSP is the contributor. Individual RRSPs are registered in your name, the investments in that account belong to you, and you are the only contributor. With a spousal RRSP, the account is registered in your partner’s name, they own the investments in that account, but YOU are allowed to contribute to it and receive the annual tax deduction when you file your tax return.
How does a spousal RRSP work?
A spousal RRSP is an excellent tool to include in your retirement strategy. It’s important for both partners to feel financially secure in order to enjoy all that your retirement has to offer! With a spousal RRSP, you are able to split your income during your retired years with the potential of reducing your combined income tax. This is an appealing benefit to couples where one partner has a pension plan or falls into a higher tax bracket upon retirement. In order to qualify for this type of RRSP, you must have a child by birth or adoption OR share custody and support of your spouse’s children AND have lived as a couple for at least 1 year.
Spousal RRSPs also have a unique set of rules regarding contribution limits, withdrawals and investment ownership. Here is a quick rundown for you:
Contribution limits: Much like an individual RRSP, a spousal RRSP is subject to contribution limits. However, because 2 people are contributing to one account, the limits differ. For example, any contributions you make to your spousal RRSP are tax deductible to you, but it reduces the contribution limits of your individual RRSP. These contribution limits are attached to YOU rather than your accounts, so your combined contributions to either account cannot exceed your personal limit. Your contributions also will not affect the contributions your spouse can make to the account.
Withdrawals: As with an individual RRSP, early withdrawals from your spousal RRSP are subject to tax penalties. If money is taken out of the account within 3 years of the contribution date, regardless of who withdraws the money, the contributor of the money will be responsible for paying the tax on it. If the money is withdrawn after 3 years of the contribution date, then your spouse is responsible for paying the tax.
Investment ownership: Extenuating circumstances may result in you having to separate your finances before retirement. Each case is different and will be subject to its own limitations. However, as a rule of thumb, married couples are required to split the assets equally while common-law couples will have a harder time determining ownership of the assets.
A retirement strategy that is in the best interest of you and your spouse is best discussed with a professional advisor. Creating a unique strategy and analyzing the outcomes is what Darryl Smith at Synergy Life Financial offers to our clients in order to ensure a financially strong and sustainable retirement. Whether you’re looking for a second opinion or a solidified plan that can change as you progress through life give him a call at (705) 434-0562 when it’s time discuss your goals!