02/20/2014 12:21 EST | Updated 04/22/2014 05:59 EDT

Why a Spousal RRSP Is Worth it

With the introduction of pension income splitting in 2007, couples may not see the need for a spousal RRSP any longer. But there are good reasons to consider this other income splitting option before retirement.

Spousal Registered Retirement Savings Plans (RRSPs) may not look as attractive now that seniors can split eligible pension income. So, instead of splitting income in the form of a spousal RRSP, couples with one main breadwinner can just wait until retirement and split the income then. So why is a spousal RRSP still an option?

Spousal RRSPs work on the same principals as a standard RRSP, except one spouse makes the contribution and puts it into the other's name. Usually, it is the spouse earning the higher income that makes the contribution. The contributor must have RRSP contribution room available to make a deposit into a spousal RRSP. For example, if your RRSP contribution limit is $20,000, you can deposit $15,000 into your personal RRSP account and $5,000 in your spousal RRSP account so you do not exceed your limit.

The contributor still claims the RRSP deduction for the amount in the spousal plan because he or she has the income to benefit from it. However, the other spouse is the owner of the RRSP and has control over the funds.

Spousal RRSPs also make sense if you plan to retire before age 65 and convert the plan into a RRIF. Although RRIF payments are considered eligible pension income, you can't split the income until the owner of the account reaches age 65. So if an early retirement is in your sights, pension income splitting may not be available for a few years, and in that case a spousal RRSP lets you split some of income before age 65.

And there can be some comfort for the spouse earning little to no income from a spousal RRSP. That person has his or her own account and can access money in case something should happen to the spouse.

There are measures in place to prevent people from attempting to use a spousal RRSP as a way to pay less income tax. You cannot just open a spousal RRSP account and then have your spouse withdraw the money a few months later. Since that person has little to no income, you might assume the money is taxed in his or her hands, but this is not the case.

If an amount is withdrawn from a spousal plan within three years of it being opened, the contributing spouse is required to report the money as income. For example, if you contributed $4,000 in 2012 to a spousal RRSP and your spouse withdraws all the funds from the plan in 2014, you would be required to report $4,000 as income. That may not seem fair, but the measure is meant to keep people from avoiding income tax.

No matter what kind of RRSP you open, spouses need to discuss designating the beneficiary. Usually, it is easiest to have the other spouse as the beneficiary. Tax rules allow you to roll that person's RRSP into yours upon death. If the RRSP is designated to someone else, the entire RRSP amount is considered sold on the date of death and the estate will need to pay the taxes as part of the final return filings. There also special rules for financially dependent children.

Remember, you can make contributions to a spousal RRSP until the end of the year in which your spouse or common-law partner turns 71. So even if you are older than 71 but your spouse is younger, you can still deposit funds into an RRSP as long as you have the contribution room available.

Spousal RRSPs make sense for many people, even with the pension-splitting option now in place. If you understand how they work, a spousal plan can save you a fair amount of tax dollars.


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