RRSP & Spousal RRSP
The RRSP is easiest to think about as a way to move taxable income between years. You contribute while you’re in a higher tax bracket, get the deduction now, and then pay tax later when the money is withdrawn. If the withdrawal happens in a lower tax bracket, the strategy worked.
That’s the basic reason I prioritize this account. When my marginal tax rate is high, the RRSP deduction is valuable because it lets me defer income into years where I expect to be taxed at a lower rate.
The Spousal RRSP uses the same basic idea, but adds another dimension. Instead of only moving income between years, it can also help move future taxable income between spouses. The contributor gets the deduction, but the account belongs to the spouse whose name is on it. When withdrawals eventually happen, the goal is usually for that income to be taxed in the lower-income spouse’s hands.
RRSP
For a regular RRSP, the strategy is fairly straightforward:
- contribute in high-income years;
- invest the money while it grows tax-deferred;
- withdraw later, ideally in lower-income years; and
- use the tax refund productively instead of treating it like free money.
This works best when there’s a meaningful gap between the tax rate when you contribute and the tax rate when you withdraw. If you’re in a low tax bracket today, the RRSP may not be the best account to prioritize. In that case, the TFSA is often simpler because there are no future tax implications.
The risk with making the RRSP too large is that withdrawals are taxable income. If future withdrawals push you into a high tax bracket, you lose some of the tax arbitrage that made the RRSP attractive in the first place.
Spousal RRSP
The Spousal RRSP is where the planning gets more interesting.
The common use case is retirement income splitting. If one spouse earns much more than the other during working years, it may not make sense for all the retirement assets to end up in the higher-income spouse’s RRSP. A Spousal RRSP can help balance things out so each person has retirement income to draw from, hopefully making better use of lower tax brackets.
However, a Spousal RRSP can also be used to plan around predictable low-income years.
For example, some households know in advance that one partner is likely to have little or no income for a stretch of time. Maybe one parent plans to stay home with kids. Maybe someone is going back to school, starting a business, taking a sabbatical, or stepping away from work for another reason. If the household knows that period is likely, then earlier Spousal RRSP contributions may create useful options later.
The general idea is:
- The higher-income spouse contributes to a Spousal RRSP and receives the tax deduction.
- The account belongs to the lower-income spouse.
- After waiting long enough to avoid the attribution rules (see below), the lower-income spouse may choose to withdraw while they have little or no income.
- The withdrawn money is taxed in their hands, potentially at a much lower rate.
The money could then be used for cash flow, debt repayment, or moved into a non-registered account. Or the account holder may simply choose not to withdraw and let the RRSP keep compounding. The value is having more options.
Attribution rules
The part that makes this complicated is attribution.
Spousal RRSP withdrawals can be attributed back to the contributing spouse if there were recent contributions. In plain language: if you contribute to a Spousal RRSP and the money is withdrawn too soon, the CRA may tax the withdrawal back to you instead of to your spouse.
The common shorthand is the three-year rule: withdrawals can attribute back if the contributor made Spousal RRSP contributions in the year of withdrawal or the two previous calendar years.