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(Friday, February 12, 2010)Spousal RRSP
Summary
The use and benefits of a spousal RRSP as well as the items to consider in order for a couple to fully minimize their tax position over the long term
Article
February is traditionally the month of hearts and valentines, but for those in the financial services field it is a time when clients make their last minute dash to purchase RRSP investment, either to offset taxes which may be outstanding in April, or to trigger a tax refund. As far as a tax shelter RRSP’s do offer a direct reduction in taxes. In the past few years spousal RRSPs have been popular. A spousal RRSP is actually an RRSP contribution made by one spouse - say Spouse A - to another spouse’s RRSP plan - Spouse B (commonly referred to as the annuitant.) Even though the money is invested in Spouse B’s RRSP, Spouse A gets to deduct the RRSP contribution.
Spousal contributions are extremely important to couples where one person’s income, either currently or in the future, will be higher than the other. One important principal of tax planning is that a family pays the least amount of taxes when both members of the couple pay taxes on approximately the same amount of income. If a family has a set amount to save for retirement, the contribution should always be made by the person earning the highest income. If one spouse has a much higher income, this income can be reduced by RRSP contribution AND the amount contributed saves the most amount of tax. For example, based on 2008 British Columbia tax rates, a taxpayer who contributes $10,000 to a RRSP and is in the lowest taxable income of $35,016 or below will only save $2,035, whereas a taxpayer who contributes $10,000 to a RRSP and is in the highest taxable income of $123,184 or better will save $4,370.
However, by taking advantage of a spousal RRSP the couple is working toward equalizing their earning potential in the future. This is particularly important when one spouse may receive a pension on retirement but the other spouse may not. In this case, the other spouse should have substantially more in their RRSP account to bring into balance the earnings of the couple and, therefore, pay the least amount of taxes.
An important point is that one spouse can not ‘borrow’ or ‘use’ the other spouse’s contribution limit. If one spouse is allowed to contribute say $40,000 in RRSP because they have not been contributing money to an RRSP, the other spouse can not borrow or use this limit. So this year when you make your contribution keep in mind not only what the current income levels are for both income-earners of the family but also what income levels will be when you plan to retire. This year, it could be in your best interest to purchase a spousal RRSP.
