What Is a Spousal RRSP and How Does It Work?
Understand spousal RRSPs, how they work, and their benefits for couples' retirement planning and tax strategies.
Registered Retirement Savings Plans (RRSPs) are a key tool for retirement planning in Canada, allowing individuals to save and invest. These plans allow investments to grow on a tax-deferred basis, with taxes paid upon withdrawal in retirement. While standard RRSPs are owned and contributed to by an individual, a spousal RRSP represents a specific variation designed to support particular financial planning objectives for couples.
Understanding Spousal RRSPs
A spousal RRSP is a retirement savings plan where one spouse (the “annuitant”) owns the plan, and the other (the “contributor”) makes contributions. This arrangement is available to both married couples and common-law partners. The primary objective of a spousal RRSP is to enable potential income splitting during retirement, which can help reduce a couple’s overall tax burden.
The design of a spousal RRSP aims to balance retirement income between partners, particularly when there is a notable difference in their current earnings or projected retirement incomes. By shifting future taxable income from the higher-income spouse to the lower-income spouse, the couple can potentially benefit from lower marginal tax rates on withdrawals in retirement. Although the contributor makes deposits, the assets legally belong to the annuitant spouse, who controls the account, including investment decisions and withdrawal timing.
Contribution Mechanics and Tax Treatment
Contributions to a spousal RRSP use the contributor spouse’s RRSP deduction limit. The amount a contributor can deposit is limited by their personal contribution room, which is calculated as 18% of their previous year’s earned income, up to an annual maximum set by the Canada Revenue Agency (CRA). For example, the maximum limit for 2024 was $32,490, with unused room carrying forward from prior years.
The contributor spouse claims the tax deduction for contributions to the spousal RRSP on their income tax return. Contributions to a spousal RRSP count towards the contributor’s overall RRSP limit. This means a contributor cannot exceed their total personal RRSP contribution room by contributing to both their own plan and a spousal plan. Contributions can be made up to 60 days into the new calendar year to be deductible for the previous tax year.
Withdrawal Rules and Attribution
Withdrawals from a spousal RRSP are generally taxed in the hands of the annuitant spouse. This taxation occurs at their marginal income tax rate at the time of withdrawal. However, a specific provision known as the “attribution rule” applies to prevent immediate tax avoidance through rapid withdrawals.
The attribution rule states that if contributions were made to the spousal RRSP in the current or two preceding calendar years, withdrawals during that period may be taxed to the contributor spouse. For instance, if a contribution is made in 2025, and a withdrawal occurs anytime between 2025 and the end of 2027, the contributor may be taxed on that withdrawal. This rule does not apply in certain circumstances, such as when withdrawals are made after the relationship breaks down, upon the death of either spouse, or for withdrawals under specific programs like the Home Buyers’ Plan or Lifelong Learning Plan. It also generally does not apply to minimum withdrawals from a Registered Retirement Income Fund (RRIF) that originated from a spousal RRSP.
A spousal RRSP must be converted into a RRIF or used to purchase an annuity by December 31 of the year the annuitant spouse turns 71. Once converted to a RRIF, minimum withdrawals become mandatory starting the following calendar year. These minimum RRIF withdrawals are typically taxed to the annuitant, unless the attribution rules apply to amounts withdrawn in excess of the minimum, if recent contributions from the contributor are present.