22 Feb Save on taxes with a spousal RRSP
According to some studies, being married can be good for your health and even help you live longer. But did you know that it can also lead to a tax break?
Contributing to your common-law or married spouse’s registered retirement savings plan (RRSP), can help build your partner’s retirement nest egg. At the same time, you can lower the amount of tax that you pay collectively.
A tax break now ~ That’s because when you contribute on behalf of your spouse, you get the tax deduction. So if you earn significantly more than your spouse, you will get a bigger tax break by contributing to a spousal RRSP, than your spouse would by contributing to his or her own RRSP. Whether you contribute to your own or to a spousal RRSP, your contribution counts against your own RRSP deduction limit — the maximum RRSP contribution you can claim as a deduction on your income tax return for the current year. Your spouse’s contribution limit is not affected, however, by your contribution to a spousal RRSP.
A tax break later ~ There can also be a tax break down the road, during retirement. Let’s assume once again that you are the spouse with the significantly higher income and — as an example — that you’ve decided that you need to withdraw a total of $5,000 a month, as a couple, from your RRSPs. Thanks to the additional funds you have contributed, your spouse will be able to withdraw a bigger share of that $5,000 from his or her RRSP, which will allow you to withdraw less from yours.
Spousal RRSPs are subject to a number of rules. After you’ve made a spousal RRSP contribution:
~The money belongs to your spouse. He or she controls the account and when the money is withdrawn, it’s taxed as his or her income as long as certain conditions are met.
~You can contribute to an RRSP until the RRSP owner turns 71. So, if you are over 71 and can no longer contribute to your own RRSP, but your spouse is younger, you can both still benefit. If you still have earned income and RRSP contribution room, you can keep putting money in a spousal RRSP and defer your taxes while your spouse’s RRSP grows, until he or she turns 71.
Early RRSP withdrawals can be costly ~ It’s important to remember that spousal RRSPs are meant for long-term retirement savings, not short-term tax shelters. That’s why the government imposes a penalty if you withdraw money within three years of contributing to a spousal RRSP.
When you’re considering a spousal RRSP, it’s important to look at your and your spouse’s current financial circumstances, and project what they might look like at retirement. As everyone’s financial circumstances are different, it’s always a good idea to consult a financial professional.
To read the rest of this article by SunLife, CLICK HERE. If you have questions be sure to contact Harry Perler or David Olejnik.