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How Spousal Plans
could save you thousands

Equalizing retirement income between couples is an effective tax-reduction strategy, and the spousal RRSP can be a powerful tool for implementing it. See if it makes sense for you.

You already know that contributing to a Registered Retirement Savings Plan can save you thousands of dollars. You get a tax deduction immediately, and defer tax on your contribution until after you retire, when you'll probably be in a lower tax bracket. A spousal RRSP takes these concepts one step further. It's worth a close review, because the tax benefits could be enormous in years to come. Here's how they work, and why:

Income-splitting
Think of a spousal RRSP as a tool in long-term retirement planning. The key is that it can help a couple reduce their overall income tax bill by splitting income more evenly between them .Spousal RRSPs are most effective when the spouses are at different ends of the income tax spectrum. One spouse contributes to the spousal RRSP an, claims the immediate tax deduction. The funds in the spousal RRSP accumulate, free of tax, until they're withdrawn by the other spouse .The tax savings can be significant. For example, consider a B.C. couple with a combined retirement income of $60,000. If $50,000 were earned by one spouse, that spouse would have to pay $14,367 in income tax. The $10,000 earned by the other spouse would attract tax of $1,096. Total tax bill:$15,463

But suppose they could split that $60,000 income, so that each spouse is reporting $30,000. Each spouse would pay $6,281 in income tax. The total tax bill would be $12,562, or a savings of almost $3,000.

To accomplish that, the spouses need to equalize their retirement income. That's where a spousal plan can help(see Guide Post) There can be other benefits. If your spouse is younger than you, a spousal plan makes it possible to contribute even after you turn 69, the year your own RRSP must mature.(Before the recent federal budget, you had until the end of the year you turned 71 to mature your RRSP) As long as you have earned sufficient income, you can contribute to your spouses's RRSP until the end of the year in which he or she turns 69. If your spouse is much younger than you, that can add up to many years of tax-sheltered compound growth.

How much to contribute
Contributions to a spousal RRSP are confined to the total amount of the contributor's own limits. This means that in any given year you may contribute to your own RRSP, a spousal plan, or both. The total must not exceed your allowed maximum for the year. However, the contributions you make for the spousal plan will not decrease the amount your souse may contribute to his or her own plan.To determine how much to contribute to your spousal plan and to your own keep in mind your long-term retirement plan. Consider the current value of both your spouse's and your own RRSPs, estimate how much they'll be worth by the time you'll be drawing on the income, then contribute as necessary to equalize the amounts. You'll also need to consider the effect of employer pension plans. If your spouse has a company pension that will provide a large amount of income after retirement, you'll need to factor that in the equation.

The three-year rule.
There's one tax planning point you'll need to work around, known as the attribution rules.
If money is withdrawn from a spousal plan in the same year as the contribution was made or within the following two calendar years, the withdrawal will beattributed to the spouse who made the contribution. In other words, the contributor will have to pay the tax on the withdrawal.
This rule applies to any spousal RRSPs to which a contribution has been made, so you can't avoid the rules by setting up more than one plan. The only way to steer clear of the three-year rule is to wait until the time is up before you make a withdrawal from the spousal plan. In addition, the three-year rule doesn't apply if there is a divorce, or if either spouse becomes a non-resident of Canada or dies.

GuidePostThe Spousal RRSP at a glance

What it is: A spousal RRSP is a registered plan to which one taxpayer contributes, while the assets in the plan are registered in the name of the contributor's spouse. Common-law unions are considered eligible if the two partners have lived together for a year or more, or if they have children.
When to use it: A spousal RRSP is a tool for long-term retirement planning. It's most effective when used to equalize pot-retirement income, by ensuring that both spouses have similar incomes
Contribution limits: The total contributed to your own and to spousal plans cannot exceed your annual maximum contribution (plus any contribution room that has been carried forward). For 1996, the limit is 18% of the previous year's earned income, to a maximum of $13,500 (;plus any applicable pension adjustment).
How to start: Contributing to a spousal RRSP is just like contributing to your own. You can open a spousal plan just as you would open your own RRSP.