If you are not familiar with all the mechanisms of RRSPs, Spousal RRSPs, TFSAs and some of the other types of accounts which are offered at Banks, Investment Dealers and Insurance Companies in Canada, it can be very easy to misunderstand how they work and how they differ. This is very common with Spousal RRSPs.
Often when the account is being set up the advisor gives a quick verbal explanation of how the account works and what the benefit will be to you. Sometimes you get the details in writing, but let’s face it, how many people ever bother to read the fine print?
On more than one occasion I have run across people who misunderstood how their Spousal RRSP works.
To cover the basics – It is a retirement savings account which allows one spouse (husband or wife) to make deposits into the retirement fund of the other spouse. They can be married or common-law. This is most useful in cases where one spouse earns a higher income than the other, or one spouse will have a higher retirement income from a fully funded defined benefit pension plan, and the other will not.
The main things to remember are
- the account is set up in the name of the receiving spouse
- the spouse who makes the contribution is the one who gets the tax deduction
- the receiving spouse, who’s name is on the account, is the owner of the account
- the owner of the account makes all the decisions about how and where the money is invested
- the contributor has no say in how the account is operated, or how or when money is withdrawn
- in the event of marital breakdown the money in this account will be included in the marital assets calculations and apportioned according to the divorce agreement, the contributor does not have a right to ask for the return of the money
- tax attribution rules mean that if money is deposited by the first spouse and withdrawn within the first three years by the receiving spouse, it will be taxed back to the original contributor
- exceptions to the three year rule occur in case of marital breakdown or death of the account owner
So are Spousal RRSPs a good idea? Yes. Although new pension splitting rules have reduced the income splitting benefit slightly, it is still good financial planning to equalize income as much as possible and ensure the both spouses have fully funded retirements.
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