Spousal RRSP Contributions

Spousal RRSP Contributions

Registered Retirement Savings Plans allow Canadian Taxpayers to make contributions every year to their own savings plans. These contributions can also be made to the registered savings plans of your spouse. The benefit of making a spousal RRSP contribution may be substantial as it could allow for taxation to occur at different tax rates between you and your spouse. Essentially, spousal RRSP contributions are an acceptable way of income splitting for individuals. This is different from the treatment of spousal contributions to American ira plans such as the roth ira.

As Canadians, we are able to take advantage of the tax law that permits one spouse to essentially make payments and save for the retirement of the other spouse. Basically, any taxpayer can make contributions to his or her spouses Registered Retirement Savings plan and designate his or her spouse as the annuitant. For the taxpayer, this will reduce the amount the taxpayer can put into his own plan. However, the amount will be taxed on behalf of the spouse upon withdrawal. This could allow higher income earning spouses to transfer income to lower income earning spouses in a tax deferred timed way.

For instance, if one spouse is taxed at the 40% tax bracket and another spouse is taxed at the 20% tax bracket, the transferring of income will allow for a 20% reduction in the tax the couple will have to pay. On $100,000 of income that would amount to $20,000. Over time this contribution can allow for substantial tax savings.

The one exception to this rule occurs when the current or previous 2 years of contributions are being considered. In these cases the amounts are taxed on behalf of the contributor. Therefore, you should plan ahead and begin using this method of tax deferral and income splitting well in advance of your planned retirement. This should be reviewed with your financial advisor and chartered accountant if you have one. These tax strategies and many other tax planning tips to save you money can be found in more detail at http://www.incometaxplanningtips.com.