During this exciting RRSP season (where the main topic seems to be whether you can sex up the argument about TFSA or RRSP) there does not seem too much being mentioned about the Spousal RRSP and its uses in an Bimodal Savings system.
Let me be clear if you fit into any of the following groups then this advice is not for you:
- Not married, if you don’t have a spouse, you can’t have a spousal RRSP.
- You are married but your spouse makes as much as you do
- You and your spouse have a good pension plan (which you are sure is going to exist when you retire)
- You view RRSPs as the devil’s own way to screw you into paying more taxes later in life.
In all those situations the Spousal RRSP really doesn’t do you too much good, however, if you are not one of the previous group, look into a spousal RRSP.
The spousal RRSP was first introduced as the original income sharing mechanism (for retirees) many years ago, but it can be used for that even before you retire (if you are careful, and you don’t care about your retirement funds).
On the retirement side of things, it is relatively straight forward and allows your spouse and you to split your moneys for retirement years, using a spousal RRSP, and if you have a spouse who is not going to have much of a retirement nest egg, the spousal RRSP will work well for that goal.
The way it can be used for income splitting (this is really simplified, do not do this until you consult with a financial professional) is once you put money in a spousal RRSP your spouse can withdraw from it and it will be taxed in their hands after three years. The 3 year settling period (for lack of a better term) is the key to this, after 3 years the money is viewed to be in your spouse’s hands and thus will be taxed with their tax account. Something to think about, but not really a good use of the Spousal RRSP overall (you lose that RRSP room each time your spouse withdraws from the funds). As I said, do not attempt this before consulting with a Financial Professional.
So let us give a cheer for the forgotten Spousal RRSP, it still can be an important part of your retirement plan!