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Make Use of Spousal RSPs
Whether legally married or common-law, you are allowed to contribute to an RSP in your spouse’s name. You get the tax deduction, but the contributions will belong to your spouse.
This is a long-term strategy for couples with unequal incomes or savings. It’s aimed at reducing future tax by dividing retirement income between the couple instead of concentrating it in one spouse’s hands. Also, if both spouses have eligible retirement income, they can each claim the pension income tax credit.
Making a spousal contribution does not increase your contribution limit; you simply put part or all of it into your spouse’s plan – without affecting his or her own contribution limit. For example, suppose David and Louise each have $5,000 of contribution room this year. The combined $10,000 of contributions may go entirely into David’s plan, Louise’s plan, or be split in any way between the two.
An Important Strategy
If you are going to make spousal contributions, your spouse should consider having two RSPs if there is a possibility of he or she making withdrawals prior to retirement – one plan for his or her own money and one for the money from you. That’s because spousal contributions face a holding period that runs two years from the end of the year in which the last deposit is made. For example, the holding period for a spousal contribution on January 2, 2005 will run until December 31, 2007. As the contributor, you – not your spouse – will be taxed on withdrawals during that time. This attribution rule would not apply, however, to the other RSP in which your spouse puts only his or her own contributions.
The attribution rule is also waived for withdrawals made while you and spouse are living apart due to a marriage breakdown, or if one of you becomes a non-resident. Note that you may continue making spousal contributions even after you have passed the age of 69, when you can no longer have your own RSP. That’s if you have qualifying income or unused contribution room and your spouse is 69 or younger. What if your spouse has to turn that RSP into income? There are special rules:
- If the RSP is converted to a retirement income fund (RIF), the
attribution rule will apply only to withdrawals above the minimum
amount that must be taken from the plan each year.
- If the RSP is converted to a registered annuity, the attribution
rule will apply only if that annuity can be cashed out as a lump
sum within three years.
Many people automatically assume that a higher-income spouse should be the one who makes spousal RSP contributions. But that’s not always the best choice.
A word of caution
Remember that the goal is to balance income in retirement. Here are three situations in which it might be better for today’s lower-income spouse to make the spousal contributions:
- The lower-income spouse has a good pension plan while
the other has a poor one or none at all;
- Through better saving or investing, the lower-income spouse
currently has a much larger RSP;
- The lower-income spouse is in line for a large inheritance that can
be invested for retirement.
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