How to know a spousal RRSP is right for you

Wayne’s wife has no RRSP room, so he’s hoping she can use some of his. But there’s a better way

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Q: I have lots of room in my RRSPs, but I am retired on a lower income. My wife still works and has no room in her RRSPs. Is there a way for her to use my RRSPs and still get the tax break?

I have been looking online but can’t find an answer to this particular question.

—Wayne

A: It can be hard to find good financial advice online, Wayne. Sometimes, the advice is outright wrong. Sometimes, it can take a while to find a good source.

I too use online resources to help validate my thinking. Sometimes, I can’t help but chuckle, because my searches lead to my own articles.

RRSP room is based on a taxpayer’s earned income. Earned income generally includes employment and self-employment income, but can also include things like net rental income and CPP or QPP disability benefits. You get RRSP room based on 18% of your earned income for the previous tax year up to a maximum for the year. RRSP room is cumulative and carries forward.

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When a taxpayer contributes to their own RRSP, they get a tax deduction that can be claimed in the year of contribution or carried forward and claimed in a future year. One spouse can make an RRSP contribution on behalf of the other spouse. That contribution works in one of two ways.

If your wife gives you money to contribute to your RRSP, the contribution slip will be in your name and deductible against your low income. This may not be beneficial.

Alternatively, Wayne, your wife could contribute to a spousal RRSP on your behalf. This is an RRSP that is in your name, with the future withdrawals taxable to you, but the contribution slip is in her name and deductible against her income. Of course, with no RRSP room, a spousal RRSP won’t be immediately beneficial to you.

Spousal RRSPs are most beneficial to try to ensure spouses have similar incomes in retirement, by attempting to equalize retirement plan assets. This can help you pay less tax as a family. With the introduction of pension income splitting in 2007, whereby RRIF withdrawals (after the age of 65) or defined benefit pension income (after the age of 55) can be split 50/50 between spouses, spousal RRSPs are not as important a tool today as they used to be in the past. But who knows – the legislation could always change. Unlikely, but possible.

I think in your case, Wayne, it may be wise to have your wife contribute to a spousal RRSP going forward. If she’s in a pension plan – either defined benefit (DB) or defined contribution (DC) – she may not have RRSP room. But if she’s contributing to her own RRSP, it may be worth considering spousal RRSP contributions instead. This will help equalize your RRSPs for when she ultimately retires.

Another consideration for tax reduction for you guys has to do with your RRSP. But it won’t save you tax today. It will actually cost you tax today. And save you tax tomorrow.

If your wife is working, has a high income and has no RRSP room, I suspect she may have a large RRSP or pension. This could mean that in retirement, this RRSP / pension income combined with your own RRSP income and your CPP and OAS pensions could mean you’ll be in a higher tax bracket in the future, Wayne.

If that’s the case, you might consider taking some early RRSP withdrawals now at a low tax rate so that your income and tax bracket in your 70s and 80s could be lower. It’s not a foolproof plan, so get some tax advice from your accountant or some financial advice from your financial planner to make sure you will come out ahead. Even if you don’t need the cash flow from these RRSP withdrawals, it may enable you to contribute to your TFSA accounts and grow more assets in a tax-free environment (with tax-free withdrawals) rather than a tax-deferred one (with taxable withdrawals).

If nothing else, if you’re 65, Wayne, converting some or all of your RRSPs to a RRIF will enable you to qualify for the pension income amount, a tax credit for up to $2,000 of eligible pension income. RRIF income counts – RRSP withdrawals, CPP and OAS do not. This could enable you to start accessing $2,000 tax-free from your registered accounts with a full or partial conversion.

So although your wife won’t be able to use your RRSP room to her benefit, Wayne, I still think there are some ways to leverage your RRSP. Spousal RRSPs may be worth considering, whereby your wife contributes to your RRSP with her RRSP room to help you pay less tax as a couple in the future. And RRSP withdrawals, or potentially converting your RRSP to a RRIF, might help you pay less tax in the future as well by paying a bit of tax today.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.


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