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Lower your taxes with a Spousal RRSP

The registered retirement savings plan (RRSP) deadline has already passed and although you likely have a plan in place for your own RRSP contribution, have you thought about contributing to your spouse’s or common-law partner’s RRSP as a part of your overall financial plan?

What is a Spousal RRSP?
A Spousal RRSP is an RRSP in your spouse’s or common-law partner’s name that you are allowed to make contributions to. The funds you contribute then belong to your spouse or common law-partner. There are some key benefits that result from your contributions to a Spousal RRSP, including a deduction in your income tax for this year and, like regular RRSPs, tax-deferred growth.

Tax-saving strategies
A Spousal RRSP can be a great tax-reduction strategy for a couple, especially if you and your spouse or common-law partner have varying income levels. The individual with the higher income can contribute to the spouse with the lower income’s Spousal RRSP. This “income splitting” is an effective strategy to lower the overall taxes your family pays. The contributor is then able to claim this contribution as a tax deduction. And both individuals are able to save and receive income in retirement.

A Spousal RRSP is also an effective tax-reduction strategy in the event that one individual is over the age of 71. At this age, you are no longer eligible to contribute to your own RRSP, but you are still allowed to contribute to your spouse’s RRSP to help lower your income taxes in the year(s) in which you contribute.

Contribution limits and withdrawals
There are a few things to keep in mind when contributing to a Spousal RRSP. Contributions you make to your own RRSP and a Spousal RRSP may not exceed your personal contribution limit for the year. You can find your contribution limit in your most recent Notice of Assessment from the Canada Revenue Agency. On the other hand, any contributions you make do not impact your spouse or common-law partner’s contribution limit.

Withdrawal rules are an important factor to keep in mind when deciding if contributing to a Spousal RRSP is right for you. This is especially in the case of what’s generally referred to as the three-year rule,” which states that if your spouse withdraws funds you contributed in the current or past two calendar years, you are the one who is taxed.

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