Spousal RRSP: Inheritance and Tax Strategies
Key Takeaways
- 1Understanding spousal rrsp: inheritance and tax strategies is crucial for financial success
- 2Professional guidance can save thousands in taxes and fees
- 3Early planning leads to better outcomes
- 4GTA residents have unique considerations for inheritance planning
- 5Taking action now prevents costly mistakes later
Quick Summary
This article covers 5 key points about key takeaways, providing essential insights for informed decision-making.
Quick Answer
Spousal RRSPs enable tax-efficient income splitting in retirement and smooth inheritance transfers. Contributions use your room but belong to your spouse, with withdrawals taxed at their rate after 3 years. For inheritance, spousal RRSPs roll seamlessly to the surviving spouse. Maximum benefit comes from equalizing retirement income between spouses.
The spousal RRSP is one of Canada's most powerful yet underutilized tax planning tools. It enables income splitting during retirement and creates a seamless inheritance mechanism for surviving spouses. For couples with income disparities - whether now or expected in retirement - spousal RRSPs can save tens of thousands in lifetime taxes.
How Spousal RRSPs Work
A spousal RRSP is an RRSP owned by your spouse (or common-law partner) to which you make contributions:
- Your contribution room: Contributions reduce your RRSP room, not your spouse's
- Their asset: The account belongs to your spouse - their name, their control
- Your tax deduction: You claim the contribution on your tax return
- Their tax on withdrawal: After 3 years, withdrawals taxed at their rate
Key Distinction
You can contribute to both your own RRSP and a spousal RRSP, but your total contributions cannot exceed your contribution room. The combined limit is 18% of previous year's earned income to a maximum of $31,560 (2024) plus any carried forward room.
Tax Savings from Income Splitting
The primary benefit is equalizing retirement income between spouses to minimize combined tax:
Example: $100,000 Retirement Income
| Scenario | Spouse 1 | Spouse 2 | Combined Tax |
|---|---|---|---|
| No splitting (100/0) | $100,000 | $0 | ~$23,500 |
| With spousal RRSP (50/50) | $50,000 | $50,000 | ~$12,000 |
| Annual Tax Savings | ~$11,500 |
Ontario rates, 2024. Assumes no other income. Actual savings vary by situation.
Over a 25-year retirement, this could mean $200,000+ in tax savings.
The 3-Year Attribution Rule
The attribution rule is the most important aspect to understand:
- If spouse withdraws within 3 calendar years of your last contribution, the withdrawal is taxed to you
- After 3 full calendar years, withdrawals are taxed to your spouse
- The clock resets with each contribution
- Only the amount of recent contributions is attributed (FIFO - first in, first out)
Planning Around Attribution
If you plan spousal RRSP withdrawals starting in 2029, make your last contribution by December 31, 2025. This allows the full 3-year period to pass. Many couples stop spousal RRSP contributions in their early 60s to enable penalty-free withdrawals in late 60s.
Key Takeaways
- 1Spousal RRSP contributions use your room but create an asset in your spouse's name
- 2After 3 years, withdrawals are taxed at your spouse's lower rate - significant savings
- 3On death, spousal RRSPs continue tax-free for the surviving spouse
- 4Can contribute to spouse's RRSP until end of year they turn 71, even if you're older
- 5Ideal when there's significant income disparity between spouses in retirement
Quick Summary
This article covers 5 key points about key takeaways, providing essential insights for informed decision-making.
Spousal RRSPs and Inheritance
Death of the Contributor
If you (the contributor) die:
- The spousal RRSP belongs to your spouse - nothing changes
- It's not part of your estate (it's already your spouse's asset)
- No tax consequences, no probate, no delays
- Your spouse continues withdrawals as planned
Death of the Annuitant (Your Spouse)
If your spouse (the account holder) dies:
- If you (contributor) are named beneficiary, it can roll to your RRSP/RRIF tax-free
- The rollover uses your available RRSP room or goes to existing RRIF
- If no RRSP room and no RRIF, it's included in deceased's final return
- Other beneficiaries receive taxable payment
Strategies for Maximum Benefit
1. Project Retirement Income
Estimate each spouse's retirement income from all sources:
- CPP (check statements for projected amounts)
- OAS (universal at 65, clawed back above ~$90K)
- Pensions (defined benefit or defined contribution)
- RRSP/RRIF withdrawals
- Non-registered investments
- Rental or business income
If one spouse will have significantly more, spousal RRSP contributions now can equalize future income.
2. Contribute to Spouse's RRSP After 71
You must convert your RRSP to RRIF by end of year you turn 71, but:
- You can continue contributing to spouse's RRSP until they turn 71
- This uses your contribution room (if you still have earned income)
- Valuable if you're older than your spouse
- Extends tax deferral beyond normal limits
3. Bridge to Pension Income Splitting
Before age 65, RRIF income doesn't qualify for pension income splitting. Spousal RRSP fills the gap:
- Ages 60-64: Use spousal RRSP withdrawals for income splitting
- Age 65+: Pension income splitting available for RRIF income
- Spousal RRSP still useful for splitting beyond 50%
When Spousal RRSPs Make Sense
Ideal Candidates for Spousal RRSP
| Situation | Why Spousal RRSP Helps |
|---|---|
| One high-income, one lower-income spouse | Equalize retirement income for lower combined tax |
| One spouse has pension, other doesn't | Build RRSP for spouse without pension |
| Planning early retirement (before 65) | Income splitting before pension splitting available |
| Older contributor, younger spouse | Contribute to 71, extend tax deferral |
| Estate planning for surviving spouse | Assets already in spouse's name, avoid estate |
Frequently Asked Questions
Q:How does a spousal RRSP differ from a regular RRSP for inheritance?
A:When you die, a regular RRSP can roll tax-free to your surviving spouse. A spousal RRSP works similarly - it belongs to your spouse, so it simply continues in their name. The key difference is in lifetime income splitting: spousal RRSP withdrawals are taxed to the lower-income spouse (after the 3-year attribution period), providing significant tax savings during retirement.
Q:What is the 3-year attribution rule for spousal RRSPs?
A:If your spouse withdraws from a spousal RRSP within 3 years of your last contribution, the withdrawal is attributed back to you for tax purposes. After 3 years, withdrawals are taxed in your spouse's hands. This rule prevents short-term income splitting. Plan contributions strategically - stop contributing 3 years before planned withdrawals.
Q:Can I still contribute to a spousal RRSP after age 71?
A:You can contribute to your spouse's spousal RRSP until the end of the year they turn 71, using your own contribution room. This is valuable if you're older than your spouse - you can continue contributing even after converting your own RRSP to a RRIF. This extends the tax deferral and income-splitting benefits.
Question: How does a spousal RRSP differ from a regular RRSP for inheritance?
Answer: When you die, a regular RRSP can roll tax-free to your surviving spouse. A spousal RRSP works similarly - it belongs to your spouse, so it simply continues in their name. The key difference is in lifetime income splitting: spousal RRSP withdrawals are taxed to the lower-income spouse (after the 3-year attribution period), providing significant tax savings during retirement.
Question: What is the 3-year attribution rule for spousal RRSPs?
Answer: If your spouse withdraws from a spousal RRSP within 3 years of your last contribution, the withdrawal is attributed back to you for tax purposes. After 3 years, withdrawals are taxed in your spouse's hands. This rule prevents short-term income splitting. Plan contributions strategically - stop contributing 3 years before planned withdrawals.
Question: Can I still contribute to a spousal RRSP after age 71?
Answer: You can contribute to your spouse's spousal RRSP until the end of the year they turn 71, using your own contribution room. This is valuable if you're older than your spouse - you can continue contributing even after converting your own RRSP to a RRIF. This extends the tax deferral and income-splitting benefits.
Spousal RRSP vs. Other Strategies
Spousal RRSP vs. Pension Income Splitting
- Pension splitting: Available at 65+ for RRIF income, elect annually, split up to 50%
- Spousal RRSP: Available at any age, no annual election, can exceed 50% split
- Best: Use both - spousal RRSP before 65, add pension splitting after 65
Spousal RRSP vs. TFSA
- TFSA: No deduction, but tax-free growth and withdrawals
- Spousal RRSP: Deduction now, tax on withdrawal at spouse's rate
- If spouse's retirement rate will be very low, spousal RRSP wins
- If rates similar, TFSA's flexibility is valuable
Common Mistakes to Avoid
- Ignoring attribution: Withdrawing within 3 years defeats the purpose
- Not projecting: Contributing without knowing retirement income picture
- Over-concentrating: One spouse with all retirement assets creates risk
- Forgetting beneficiaries: Keep designations current
- Stopping too late: Should stop contributions 3 years before planned withdrawals
Optimize Your Spousal RRSP Strategy
Spousal RRSPs require careful planning to maximize benefits while avoiding attribution issues. Our retirement and estate planning specialists can model your situation, determine optimal contribution splits, and ensure your strategy aligns with both retirement income and inheritance goals.
Contact our Mississauga office for a retirement income and spousal RRSP planning consultation.
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