Helping your clients maximize their spousal RRSP

Lowering taxes in retirement is one of the most effective ways to help your clients grow and protect their wealth. A spousal Registered Retirement Savings Plan (RRSP) can be a great tool that supports this goal. It allows one partner to contribute to the other’s RRSP while creating opportunities for income splitting and long-term tax savings. 

In this article, Wealth Professional Canada will discuss everything you need to know about spousal RRSPs. From contribution limits to attribution rules, we’ll explain how this strategy works and how it can strengthen your clients' retirement plan. If they have different income levels or want more flexibility in retirement, this is a strategy that’s definitely worth exploring. 

What is a spousal RRSP? 

A spousal RRSP is an RRSP held in the name of one partner, referred to as the annuitant, but funded by the other partner or the contributor. This setup lets your clients: 

• balance retirement savings: the higher-income partner contributes to the lower-income partner's account, helping both build savings evenly 

• reduce overall taxes: the contributor claims the deduction upfront, lowering their taxable income in the contribution year 

• split income in retirement: money withdrawn by the annuitant is taxed in their hands, often at a lower rate, reducing combined household taxes 

“The main benefit [of spousal RRSP] is the potential for tax savings,” George Fiotakis said, a senior financial advisor at IPC Investment Corporation. He is also a Certified Financial Planner (CFP) and one of our 5-Star Advisors awardees in 2021. 

“The contributing spouse gets a tax deduction based on their higher income while the spousal RRSP owner’s withdrawals are taxed at their lower rate.” 

If one partner has a higher income, they can contribute up to their RRSP limit into their partner’s spousal RRSP. The contributor gets the tax break now, and when withdrawals begin in retirement, they’re taxed under the annuitant’s bracket. 

“For example, if you are in a high tax bracket and your spouse will be out of the work force for a few years or is starting a small business, the high-earning spouse can contribute and invest within a Spousal RRSP (instead of their individual RRSP),” Tatiana Enhorning said. She’s an investment advisor from Richardson Wealth and has a Chartered Investment Manager (CIM) designation. 

Watch this video to know more about spousal RRSPs: 

Want to better understand how spousal RRSPs differ from normal RRSPs? Check out this article on RRSPs and TFSAs. Bonus: it also has valuable insights about tax-free savings accounts. 

How to maximize contributions to a spousal RRSP 

Here are some tips that you can share with your clients to help them maximize their contributions to spousal RRSPs: 

Track and combine with Home Buyers’ or Lifelong Learning Plans 

Spousal RRSP contributions are eligible for Home Buyers’ or Lifelong Learning Plans withdrawals. Your clients can use up to $35,000 per plan without triggering attribution, while still contributing to retirement. Advise them to coordinate these with broader contribution patterns to avoid overcontributions and to maximize cash flow flexibility. 

Continue contributing past age 71 

When a client reaches 71, they must convert into a RRIF and stop their personal contributions. However, they can still contribute to a spousal RRSP as long as their partner is under 71. “A spouse who can no longer contribute to their own RRSP the year after they turn 71 may still be able to contribute to the spousal RRSP of their younger spouse,” Fiotakis said. 

This is a great move especially when one partner continues earning later than the other. It extends tax-advantaged growth and contributes to income splitting in retirement. 

“It can also be an effective estate planning tool in the event of the death of one spouse since an executor can make contributions to the spousal RRSP in the year of death,” he said. 

Defer tax deductions 

For clients whose income fluctuates, they might want to delay claiming the deduction. For instance, if they expect higher income next year, they can contribute now and deduct it later. This can stretch tax benefits over two years. 

“[If] the high-earning spouse is making RRSP contributions and both spouses have maximized their TFSA room, then the lower income spouse should still consider making their own Individual RRSP contributions,” Enhorning said. 

“[While it’s] true they may not need the tax deduction, but this investment account still increases the household’s tax-deferred investment growth.” 

What is the 3-year rule for spousal RRSP? 

The three‑year attribution rule exists to prevent your clients from using spousal RRSPs for short‑term tax advantages. Here’s how it works: 

1. Counting begins when a contribution is made 

Each time your client makes a contribution to their partner’s RRSP, a three‑year window starts for that specific amount. It includes the calendar year of contribution plus the next two calendar years. 

2. Taxes follow the most recent contributions 

If the annuitant withdraws funds during this window, the withdrawal is taxed to the contributor. However, it’ll only be up to the total amount they’ve contributed in the relevant three‑year period. 

For example, if your client contributed $5,000 in each of the past three years, and the annuitant withdraws $12,000, only $15,000 or the sum of contributions could be taxed to the contributor. The remaining amount would be taxed to the annuitant. 

3. After three years, withdrawals benefit the annuitant 

Contributions older than three calendar years are deemed safe. Withdrawals of this portion are taxed in the annuitant’s hands. This helps split income and lowers combined taxes. 

If your client contributes $10,000 to their partner’s spousal RRSP in 2022 and the partner withdraws $6,000 in early 2024, $6,000 will be taxed to the contributor. 

That’s because contributions in 2022, 2023, and 2024 are all within the three‑year attribution period. If they wait until 2025 or later, the withdrawal would be taxed to the annuitant instead. 

What are the disadvantages of a spousal RRSP? 

A spousal RRSP can be harder to manage if the relationship ends. Even though the account is in the annuitant’s name, the contributor might request an equalization of assets during separation or divorce. If a spouse dies, the RRSP can roll over tax-free to a surviving spouse’s RRSP or Registered Retirement Income Fund (RRIF). 

“We must look far into the future at possible risk factors,” Enhorning said. “There can be unknowns in every marriage, and we can mitigate some in regard to income splitting by being proactive with a spousal RRSP.” 

If no beneficiary is named, the funds are withdrawn and taxed through the deceased’s estate. Naming a beneficiary or successor holder in the will or plan can help avoid delays and unexpected taxes. As a financial advisor, you need to make sure that your clients plan for both scenarios in advance. 

“It’s also important to note that spousal RRSPs are generally considered family assets in divorce or separation situations, and their distribution could be subject to division in this circumstance,” Fiotakis said. 

In the end, spousal RRSPs are a valuable tool for reducing taxes and creating a more balanced retirement income for your clients. With the right strategy, you can help them take full advantage of this option while avoiding common pitfalls. 

Want to see more articles to help your clients with their overall retirement plan? Feel free to check out our Retirement Solutions page.