When it comes to retirement planning in Canada, there’s no shortage of investment vehicles, but one has to think about a smart tax strategy to be able to access and spend that money without losing a big chunk of it to taxes.

One option that often flies under the radar is the Spousal Registered Retirement Savings Plan (Spousal RRSP). It can be a fantastic tool for some couples, but like any financial strategy, it’s not a one-size-fits-all solution.

So, should you and your partner be using a Spousal RRSP? Let’s break down the pros and cons so you can decide if it’s the right move for you.

What Is a Spousal RRSP?

A Spousal RRSP is essentially an RRSP set up in one spouse’s name (the “annuitant”), but the contributions are made by the other spouse (the “contributor”).

The key benefit is the contributor gets the immediate tax deduction, while the annuitant owns the RRSP and will withdraw from it in retirement.

The main goal is to reduce overall tax liability as a couple by shifting future retirement income to the lower-earning spouse, ensuring both partners stay in lower tax brackets when it’s time to withdraw funds.

The Pros of a Spousal RRSP

1. Tax Savings Now and Later

One of the biggest advantages of a Spousal RRSP is the ability to split income and save on taxes.

Here’s how it works:

• The higher-earning spouse contributes and gets a tax deduction at their (higher) marginal tax rate.
• The lower-earning spouse withdraws funds in retirement at their (lower) tax rate.
• This results in lower overall tax paid as a couple.

For example, let’s say Jay earns $120,000 per year and their spouse Amanda earns $40,000. If Jay contributes $10,000 to Amanda's Spousal RRSP, they get a deduction at their marginal tax rate of about 43% (Ontario, 2024), saving them $4,300 in taxes immediately.

2. Earlier Access to RRSP Funds (Potentially Tax-Free)

Normally, if you withdraw from an RRSP before retirement, you get hit with taxes.

However, a Spousal RRSP offers a three-year attribution rule, meaning if the lower-income spouse leaves the money in the account for at least three years, they can withdraw it in their name and pay less tax—especially useful if they take time off work.

3. Helps with Pension Income Splitting

After age 65, RRSP withdrawals (when converted to a RRIF) can qualify for pension income splitting, but Spousal RRSPs allow for income splitting before 65.

This can be a game-changer if you’re looking to retire early and want to minimize taxes.

4. Asset Protection and Estate Planning Benefits

Since the Spousal RRSP belongs to the annuitant (the lower-income spouse), these assets remain under their name.

In the case of death, separation, or creditor protection scenarios, this could provide added flexibility and security.

Here is a post made by the CRA. They give an example. Click Here

The Cons of a Spousal RRSP

1. The Attribution Rule (Watch Out!)

The CRA has a strict rule: if the annuitant withdraws money within three years of a contribution, it gets taxed in the hands of the contributing spouse.

This defeats the purpose of income splitting and can lead to an unexpected tax bill.

2. Less Control Over Withdrawals

Since the RRSP is owned by the lower-income spouse, they decide when and how to withdraw the money.

If the couple separates or has differing financial goals, this could create complications.

3. May Not Be Necessary If Pension Splitting Is an Option

For couples over 65, RRIF or pension splitting already allows for significant tax savings. If you expect to rely mainly on pensions and RRIF withdrawals, a Spousal RRSP might not add much extra benefit.

4. Alternative Strategies May Work Better

For some couples, a TFSA strategy may be more flexible. Unlike a Spousal RRSP, TFSA withdrawals aren’t taxed at all, making it a powerful tool for tax-free income in retirement.

If the lower-income spouse already has contribution room, maxing out a TFSA could be a more efficient option.

Is a Spousal RRSP Right for You?

A Spousal RRSP is most beneficial if:

✔️ One spouse has a significantly higher income than the other.

✔️ You want to minimize taxes in retirement by splitting RRSP income before age 65.

✔️ The lower-income spouse expects to be in a lower tax bracket when withdrawing funds.

✔️ You want to equalize retirement savings and protect assets.

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However, it might not be the best choice if:

❌ The lower-income spouse already has a large TFSA contribution room.

❌ You expect to rely on pension income splitting after age 65.

❌ There’s a chance the money will need to be withdrawn within three years of contribution.

Final Thoughts

Spousal RRSPs can be a fantastic tax-saving strategy, but they’re not a magic bullet.

Like all financial decisions, it’s important to consider your specific income levels, future tax brackets, and long-term financial goals before committing.

If you’re unsure whether a Spousal RRSP makes sense for your retirement plan, speaking with a financial planner can help you maximize your tax efficiency and retirement savings.

After all, the goal is to keep more of your hard-earned money and make retirement as stress-free as possible!