2 Spousal RRSP Rules to Know
Posted by Gail | Filed under Retirement Planning
A spousal RRSP is one to which one partner contributes for the other. The person making the contribution gets the deduction for tax purposes. The person for whom the contribution was made – the planholder – owns the money once it’s in the plan.
One of the areas most misunderstood when it comes to Spousal RRSPs are the rules regarding withdrawals.
Rule #1: Only the planholder may take money out of a Spousal RRSP.
Rule #2: The tax on withdrawals from a spousal plan will be taxed in the planholder’s hands only if no contribution has been made to ANY spousal RRSP in the year of withdrawal or the two preceding calendar years.
If a contribution of any kind has been made during the year of withdrawal or the two preceding calendar years, anything contributed in that three-year window will be taxed in the contributor’s hands.
Use of the term “calendar year” is significant. Since the rule applies to the year of the withdrawal plus the two preceding calendar years, the timing of the contribution to a spousal RRSP is important. If, for example, you made a spousal contribution in September 2012 and no further contributions, the fund would be taxed in the planholder’s hands as early as January 2015. However, if you made the contribution in February 2013, the earliest you would be able to withdraw the funds without attribution would be January 1016.
If someone tells you the Spousal rule is based on anything other than “calendar” years, they’re wrong. If they tell you that it’s okay to make your own contribution to your spousal plan because it’s all the same thing anyway, they’re wrong. And if when you transfer assets from one institution to another they try to co-mingle individual and spousal RRSP money, don’t let them.
The spousal attribution rules don’t apply:
- if the contributing spouse dies in the year of the withdrawal
- if you or your partner are non-residents when the funds are withdrawn
- if you and your partner are living separate and apart at the time of withdrawal because of a relationship breakdown, or
- if the spousal RRSP funds are:
- transferred to another spousal RRSP,
- transferred to a Registered Retirement Income Fund (RRIF) and only the minimum amount is withdrawn, or
- used to purchase a life annuity or term certain annuity to age 90 or registered pension plan, provided the plan can’t be commuted for three years.