How a Spousal RRSP Works: Contribution & Withdrawal Rules

A Spousal Registered Retirement Savings Plan (RRSP) is a retirement savings vehicle within the Canadian financial system, allowing couples to strategically save for retirement. This plan involves two distinct roles: a contributing spouse, who makes deposits, and an annuitant spouse, who owns the account and receives income from it during retirement. While similar to U.S. Individual Retirement Arrangements (IRAs), the Spousal RRSP operates under unique Canadian rules. This article details the mechanics, contributions, and withdrawal considerations of a Spousal RRSP.

Establishing a Spousal RRSP

Establishing a Spousal RRSP involves defining the roles of the contributor and the annuitant. Typically, the higher-income spouse acts as the contributor, making deposits into the plan. The annuitant, who is the lower-income spouse, becomes the owner of the account. This distinction is foundational, as it dictates who receives the tax deduction for contributions and who ultimately controls the assets and receives income in retirement.

The annuitant is the legal owner of the Spousal RRSP, meaning they have control over the investments within the plan and are the one who will eventually receive the retirement income. Both spouses must meet general RRSP eligibility criteria. The contributor must have sufficient earned income to generate RRSP contribution room.

The annuitant must also be eligible to open an RRSP, generally meaning they are a resident and have not yet reached the age of 71. This structure is designed to facilitate income splitting in retirement, allowing the couple to potentially reduce their overall tax burden when funds are withdrawn. The process typically involves setting up a registered account with a financial institution, designating it as a spousal plan.

Making Contributions and Claiming Deductions

Contributions to a Spousal RRSP are made by the contributing spouse, typically the higher-income earner. These contributions, while directed to an account owned by their spouse, count against the contributor’s annual RRSP contribution room. The maximum amount that can be contributed is determined by the contributor’s earned income from the previous year, up to a specified annual limit. This means that contributing to a spousal plan reduces the contributor’s personal RRSP contribution room for that year.

The significant tax benefit of a Spousal RRSP lies with the contributing spouse. The contributor claims the tax deduction for the contributions made to the spousal plan on their income tax return. This deduction directly reduces the contributor’s taxable income for the year, potentially resulting in immediate tax savings. For example, if a contributing spouse in a higher tax bracket makes a substantial contribution, their taxable income is lowered, reducing their current tax liability.

The contribution limits are not increased by having a spousal plan; the total contributions made to both a personal RRSP and any Spousal RRSPs must not exceed the contributor’s available contribution room. Unused contribution room can be carried forward indefinitely, allowing for larger contributions in future years. The contributor must have sufficient earned income to justify the deduction claimed.

Understanding Withdrawals and Attribution Rules

Withdrawals from a Spousal RRSP are generally taxed in the hands of the annuitant, the spouse who owns the plan. This arrangement is a primary mechanism for income splitting in retirement, as it allows income to be drawn by the lower-income spouse, potentially at a lower marginal tax rate. However, the “attribution rule” prevents immediate income splitting for tax avoidance.

The attribution rule dictates that if funds are withdrawn from a Spousal RRSP within a specific period after a contribution was made, the withdrawn amount may be attributed back to the contributing spouse for tax purposes. This period is typically the calendar year in which the contribution was made and the two subsequent calendar years. For instance, if a contribution is made in 2025, any withdrawal from that spousal plan before January 1, 2028, could be attributed back to the contributor.

When the attribution rule applies, the amount of the withdrawal, up to the total of contributions made in the attribution period, is added to the contributing spouse’s taxable income for that year. This counteracts the immediate tax benefit the contributor received from the deduction, ensuring the funds are taxed at their marginal rate if withdrawn too soon. To avoid triggering this rule, it is generally advised to wait until the attribution period has passed before making withdrawals from a Spousal RRSP, allowing for legitimate income splitting in retirement.

Important Considerations and Life Events

A Spousal RRSP has an age limit for contributions. Contributions to a Spousal RRSP can continue only until the end of the calendar year in which the annuitant spouse turns 71 years old. At this point, the Spousal RRSP must be converted into a Registered Retirement Income Fund (RRIF), used to purchase an annuity, or withdrawn as a lump sum.

In the event of the death of either the contributor or the annuitant, specific rules govern the Spousal RRSP. If the annuitant dies, the assets typically transfer to their estate unless a beneficiary is designated, such as the surviving spouse. If the surviving spouse is the beneficiary, the funds can be rolled over into their own RRSP or RRIF on a tax-deferred basis, maintaining the tax-sheltered status. If the contributor dies before the annuitant, the Spousal RRSP continues as owned by the annuitant.

Separation or divorce impacts Spousal RRSPs. The assets held within a Spousal RRSP are considered matrimonial property and are subject to division in a divorce settlement. The specific treatment depends on provincial family laws and the terms of any separation agreement.