Spousal RRSP allow tax payers to effectively split income and save on tax. This is especially true when there is a large income disparity between spouses.
Spousal Registered Retirement Savings Plan are opened in the name of the lower income spouse. The lower income spouse is known as the annuitant, who in retirement will reap the withdrawal benefits. The spouse with the higher income is known as the contributor and they will be making the contributions into the spousal RRSP for the benefit of the lower income spouse.
For example, Jeff, age 45, makes $150,000 a year as a corporate executive while his wife Jennifer, age 42, makes $30,000 per year. They both can contribute up to 18% of their income into an RRSP. Jeff can contribute up to $27,000 and Jennifer can contribute $5,400. Jeff’s contribution into the Spousal Registered Retirement Savings Plan will allow Jennifer to withdraw income from her spousal RRSP in retirement at a lower tax bracket.
Withdrawing from a Spousal RRSP in Retirement
Below is an illustration showing how much Jeff and Jennifer can save if they withdraw $25,000 each in retirement. Jeff will withdraw from his RRSP while Jennifer will withdraw from her spousal RRSP. Due to Jeff’s higher income, his tax rate is twice as Jennifer’s. In the example below, the couple are able to save $5,000 a year using spousal RRSPs.
| | Jeff’s RRSP – 40% Tax Rate ($) | Jennifer’s SRRSP – 20% Tax Rate ($) |
| RRSP/SRRSP Withdrawal | 25,000 | 25,000 |
| Taxes Payable | 10,000 | $5,000 |
| After-Tax Income | $15,000 | $20,000 |
| Tax Savings (Annually) | $5,000 |
With a Spousal Registered Retirement Savings Plan, you can decide how much of your RRSP deduction limit you want to contribute. If the spouse continues to be in a lower tax bracket in retirement, then you’ve effectively split income.
