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- if you or your partner are non-residents when the funds are withdrawn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- transferred to a Registered Retirement Income Fund (RRIF) and only the minimum amount is withdrawn, or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.
February 12, 2013 at 8:14 am
Excellent information! Thanks Gail! That’s why I come to your ‘blog class’ everyday
February 12, 2013 at 10:27 am
Great information. Again, another thing my banker did not tell us when we were applying for RSPs. She said that my husband had to make a greater contribution to his RSP so that he can lower his taxes but never mentioned that he could apply for spousal RSP so my contribution can go up.
Alongside the larger bank contribution, his group pension at work compared to mine is also larger because he makes more money. In essence he is contributing double the amount in retirement savings compared to me. But I am set to retire sooner than him because I am older by four years.
We thought we were being strategic so that we wouldn’t have to pay more taxes but when it comes to building savings, it’s not so equal.
February 12, 2013 at 11:01 am
If anyone reading hasn’t yet laid their hands on a copy of “MONEY RULES” you absolutely must. It is a phenomenal read, covering so much ground! I only wish there was a resource out there like this when I was just starting out.
I love the rule #7 “Your Banker is Not Your Friend”
February 12, 2013 at 11:48 am
@Karen M. Yes, when I read “Your Banker is Not Your Friend” I was at first surprised because our banking manager was so nice and pleasant. But everything she had recommended us was so wrong and in the bank’s favour. When I told my husband all the mistakes and omissions she made he said, “But she was so nice to us. I thought we could trust her”. She was definitely nice but not working for our best interests.
February 12, 2013 at 1:02 pm
And yet it’s so hard to know who to trust! Right now I am trying to figure out where RESP money will do the most good. But for this NEXT appointment, I will go in telling her where I want the money to go rather than saying “where do you think the money should go”?
February 12, 2013 at 7:27 pm
My husband is in the next higher tax bracket than I am. He also received a large severance payment in a layoff years ago and rolled it into his RRSP account so his balance got way ahead of mine. For both those reasons we contribute almost entirely from him to my spousal account. As a minumum we do enough to get him down a tax bracket every year. Once we’re in the same bracket the only advantage to him contributing to my spousal account is to continue evening up our accounts. We’ll reach that point in another 2 or 3 years and we’ll have to assess the best plan of attack again at that point.