Spousal RRSP

[K-ice]

Can someone give me some Spousal RRSP for dummies tips?

If any of you want to post your spousal RRSP scenarios I think they would be helpful.   

Here is our case:

My SO and I currently both earn over 100K per year and our net incomes only differ by 10K. Their effective tax rate was 27% while mine was 19% as I had considerable pension deduction.   

I barely have any RRSP room due to the company pension and I put a small amount (~4K) into my RRSP every year. 

They are self employed and have over $150K in contribution room.  Should we be using up this space?

I need help convincing them that deferred taxes are better than paying taxes today.

Should they be using this room or should I? 

Thanks Canadian Mustacians!

[Lews Therin]

Yes, Yes you should :D. There, solved!

More details are necessary though: Can you throw up current ages (or general ages) of each of you?

You'll have to keep in mind that the RRSP is taxed as normal income during retirement, so make sure to not have such a large stash that it will end up being pulled out at the same taxation rate.

If you do have lots of space, and time to take it out, I'd start using up that space, then fill the TFSAs.

Best scenario: you each put in enough in the RRSP to take you both down to the amount you expect to remove during retirement (let's say 15%); every year you continue doing so until the RRSP room is full. Your spouse will not be allowed to touch the RRSP until 3 years has passed. There's a couple of explanations for the usefulness of the RRSP, you should look in a couple of the topics in Can tax discussion. For spousal, the only difference is that you are using up your spouse's space, and that they can't touch it for a small amount of time and then it becomes normal RRSP contributions after the 3 years has passed.

[Lews Therin]

https://forum.mrmoneymustache.com/canada-tax-discussion/rrsp-and-the-math/
https://forum.mrmoneymustache.com/canada-tax-discussion/optimizing-taxes-and-discussion-on-rrsp-deductions/
https://forum.mrmoneymustache.com/canada-tax-discussion/rrsp-vs-tfsa-76944/

http://therichmoose.com/post20180223/
http://therichmoose.com/post20170322/

I'm also turning on the MOOSE SIGNAL. @RichMoose . Like the bat signal, but more polite, and probably a lot more maple sugar involved.

[bluebelle]

I need more information to answer the question.....
The benefit to spousal RRSPs, is it allows for a more equal income stream in retirement (not as important now that income splitting exists).

Since you have little RRSP contribution room due to pension contributions that implies that you're going to have a pretty good pension income in retirement.

You have indicated what you and your spouse’s current RRSP balances are, just the contribution room.

You haven't given ages or planned retirement dates - those are needed as well for an answer

But in simple terms, a spousal RRSP allows you to use your contribution room, and contribute to an RRSP that your spouse owns (has sole discretion on use - that's important).  If any funds are withdrawn within 3 years of the last contribution, the income is attributed to you and you pay the tax, after 3 years, funds are taxed in your spouse’s hands.  This is most beneficial in the cases of one high income earner and one low or no income earner.  Or as a way to play catch up if one spouse has a lower RRSP amount (and no pension coming).

With the limited information you've given, I don't see a spousal RRSP benefiting unless you think your RRSP needs topping up to max their already 6 figure RRSP.

IF they already have a large RRSP (ie 'enough' to retire on) then maybe a case can be made to not contribute....personally, the only time it doesn't make sense is when you think your tax rate in retirement will be HIGHER.  If your tax rate is lower (usual case) or equal, tax deferred savings wins hands down every time.

Are they not contributing because they think our government does such a bang up job they deserve more tax?  Are they saving in taxable accounts and resistant to RRSPs or are they spending all their money and just don't want to save....I max my RRSPs every year and make sure DH does too, I'd kill to have more contribution room to not have so much savings in taxable accounts (moustachian people problem!)

[Prairie Stash]

To start, the effective tax rate is meaningles; RRSP is done with Marginal tax rates. Effective rates is just a random number SimpleTax generates for fun, I like looking at it but it doesn't mean much. You both have the same Marginal rate I bet (https://www.taxtips.ca/ - look up your province here)

Most provinces have a tax bracket around $92k. I use that as a quickie reference point (or $90k for simplicity)

Basic Assumptions
1) I assume in your retirement you plan on living on income under $92k (way under)
3) I assume you're young, at 65 its irrelevant. Income splitting exists which negates the benfits of spousal contributions.

Compare your respective total RRSP amounts; I bet yours is bigger! Spousal RRSP's are only for couples that need to make their accounts equal. Its that simple.

He should only contribute money towards the smaller RRSP (his own I assume since he has so much space). As to the amount, only enough to bring you down below the $92k bracket (presuming he's way over $100k). What you want to see is his RRSP room shrinking, not growing, with a projection of it dissapearing in the future. RRSP room isn't a race, it's a process. Its about getting large refunds now and paying small amounts later.

This does raise the obvious question; should you be doing spousal contributions towards him? That $4k might be better in his accounts to equalize the withdrawals before you turn 65.

the less obvious answer is it doesn't matter since the marginal rate upon withdrawal for each of you could be  the same. This happens if you have $600,000 and he has $400,000. Some people think matching amounts mean the accounts are equal. In math terms they're equal if the withdrawals are in the same marginal tax band. do the math yourself for fun, would a couple with $600k and $400k withdrwaing 4%/year pay more/less tax than a couple with $500k each withdrawing 4%?

In both cases the couples have $40,000 to live off, is the tax bill different? Try $300k and $700k next, that's a good way to hammer home the idea behind marginal rates.

[K-ice]

Spousal RRSP's are only for couples that need to make their accounts equal. Its that simple.

I think this is where I have the most trouble. It is a bit hard to guess who will have less income in retirement. And I guess we need to really figure that out to answer the question.

To more directly answer some of your questions:

We are 40-45. 

I hope to retire in about 13y when the pension kicks in.  (I know, not at all Mustacian but cutting the golden handcuffs is another topic)

My partner somewhat considers themselves retired. About 70% of their income is from real-estate (relatively passive) and the remainder is a self employed job they love. 

When we "retire" our incomes could be close to equal since their passive RE income should still be there and my pension.

Our RRSP are not large and about $60K each. 

Are they not contributing because they think our government does such a bang up job they deserve more tax?  Are they saving in taxable accounts and resistant to RRSPs or are they spending all their money and just don't want to save....I max my RRSPs every year and make sure DH does too, I'd kill to have more contribution room to not have so much savings in taxable accounts (moustachian people problem!)

I laughed at this. We are quite socialist but I don't want to leave anything more on the table than we need to.

My partner is firmly in the pay down your mortgage camp. They are very resistant to investing. Our house is paid off as are 2 of 3 rental properties. Our largest combined mortgage debt was $650K down to $75K now (that peek was 7y ago). So that is where most of the money has gone. 

Would you agree deferred taxes, even at the same rate, are better than paying taxes today?

[Prairie Stash]

ugh, he likes paying taxes. With mortgage interest on the rentals a tax deduction, it skews the math even more towards RRSP contributions.

What's the plan in a couple years when you have no mortgages, sit on the cash? It reads like there is a single goal, pay off debt, but no plan for after. If you went from $650k to $75k in 7 years, that says you are awesome and dedicated but may have blinders on. The goal is to modify it to keep a little bit more in your pockets.

I'm guessing that's why you're asking about spousal RRSP's, but instead of pushing RRSP, ask him what the plan is when the mortgages are completely paid off. Are you going to spend it all? Invest it all? Don't know? Let him find the answer, with minor help, its a fun question and I hope you both enjoy figuring it out together.

[K-ice]

ugh, he likes paying taxes. With mortgage interest on the rentals a tax deduction, it skews the math even more towards RRSP contributions.

What's the plan in a couple years when you have no mortgages, sit on the cash?
...

Let him find the answer, with minor help, its a fun question and I hope you both enjoy figuring it out together.

I was able to convince him to not put an extra penny to the rentals prior to paying off our primary residence. But the last 2 years we've been hitting the rental mortgages while I've doubled my RRSP.

I'd like to convince him to slow down the last of the mortgage and put something towards his RRSP.

[Heckler]

His excess contribution room can only be used to reduce his income tax now.   She cant “use “ it.  If he contributes to a spousal, it becomes her future income.  She can only contribute to a spousal (to create his future income)  up to her max RSP limit, likely low due to her pension.

Assuming his passive real estate income contines for life, and her job income does not (replaced with pension), its a complex situation if he is better off to contribute to a self RSP or a spousal.

But with a 50k RSP today, he definitly should contribute more now, to whichever side will more likely balance future of incomes (his & her the same annual taxable income)



Our situation is simpler. He makes 5x her part-time (& self employed starting a retirement business) imcome, thus he is contributing to his rsp and twice the amount to his spousal, in order to build up $300k in each of thier RSP income pile before pulling the cord at 50.  She is working on maxing her TFSA (with both of our after tax income)

[RichMoose]

Can someone give me some Spousal RRSP for dummies tips?

If any of you want to post your spousal RRSP scenarios I think they would be helpful.   

Here is our case:

My SO and I currently both earn over 100K per year and our net incomes only differ by 10K. Their effective tax rate was 27% while mine was 19% as I had considerable pension deduction.   

I barely have any RRSP room due to the company pension and I put a small amount (~4K) into my RRSP every year. 

They are self employed and have over $150K in contribution room.  Should we be using up this space?

I need help convincing them that deferred taxes are better than paying taxes today.

Should they be using this room or should I? 

Thanks Canadian Mustacians!

Given your stats you've shared, I don't think a Spousal RRSP is very applicable here. As @Prairie Stash suggests, a Spousal RRSP is almost only useful for transferring money from a high earning spouse to a low earning spouse assuming the difference is big enough to go across tax brackets.

I think the real issue here is the blind focus on debt reduction vs. using tax advantaged vehicles to maximize savings. If income is over $100k and your SO is not self employed with a corporation, contributing to an RRSP to some extent is nearly always a win.

Show the numbers and get your SO to start contributing to a regular RRSP, at minimum to get down to the $92k tax bracket. Simply put, paying down tax deductible debt on investment properties is not a smart strategy.

I don't think I can offer much more with the info shared so far. To get a complete picture and strategy we would need expenses info, savings account info, total debt by category, and other stuff you may not want to share online. ☺

[K-ice]

Our situation is simpler. He makes 5x her part-time (& self employed starting a retirement business) imcome, thus he is contributing to his rsp and twice the amount to his spousal, in order to build up $300k in each of thier RSP income pile before pulling the cord at 50. She is working on maxing her TFSA (with both of our after tax income)

Thanks for sharing your situation. We have flip flopped over the years with sometimes one making double the other and a year of unemployment an a year of leave.  But long-term I think we balance out to close to equal in retirement with one of us having a pension and the other more rental income.

Show the numbers and get your SO to start contributing to a regular RRSP, at minimum to get down to the $92k tax bracket. Simply put, paying down tax deductible debt on investment properties is not a smart strategy.

I was just eyeing that $92K tax bracket last night. I think this is a very good strategy and something he would be into.

[K-ice]

Another thought about this.

The RRSP room is there I might as well use it after I have used all my RRSP room and my TFSA. Right?

(I know Mustacian People Problem)

So I might as well use my cash had have my partner put it in a spousal RRSP for me.

Am I missing something?

The only disadvantage I see is that I will effectively pay the tax twice.  Once today as it is my after tax cash and again when I take it out of the RRSP.

My partner will get a tax refund today. Maybe we can agree to share that or something.

Any thoughts on this?

For a bit of context we have always been a his/hers/ours couple with the ours just being for living expenses and travel. Paycheques & savings have been kept separate.

[Prairie Stash]

Mustachian People Problem is having a taxable account ;) what are your thoughts on setting one up? Taxable accounts have certain advantages, such as minimizing tax after retirement. Tax minimization in retirement is a good way to lower the required withdrawals. For example; getting $30,000 from an RRSP is less to live off then pulling $30,000 from a taxable account.

Before you achieve maxed out accounts you should start considering withdrawal strategies. It can change the required savings amounts because it can remove or add taxes to your retirement spending. Do you want to save more so you can pay taxes or save less and retire sooner?

I can't answer your spousal idea because I don't know if your goal is to increase your NW or the NW of both of you. Having your partner with a larger refund increases your combined NW the most. Having a taxable account increases your NW the most (well not really, but it lowers future taxes which reduces expenses in retirement).

I say you missed discussing the taxable account option.

[FrugalToque]

Make sure you're doing the language right here.

You have an RRSP.  (yay!)
You want your spouse to have an RRSP.  (good!)

That is, emphatically, not a "Spousal RRSP" (SRRSP).  It's just your spouse's RRSP (RRSP).

A Spousal RRSP, (SRRSP), is a specific vehicle where you use your contribution room, but put money into an account in your spouse's name.

Upon retirement, your spouse withdraws from his/her SRRSP and declares it as income.
During that same retirement, you withdraw from your RRSP and declare it as income.

If you're both earning money, and you have no more contribution room, then your spouse should be contributing to his/her own RRSP.  Spousal RRSPs don't matter here.

In the Toque family, because Mrs. Toque took off much more time for the kids, I do put money into a Spousal RRSP in her name.  Then it comes off my taxes and she can use it later so we're splitting income.  But it doesn't make sense in your case.  You need your spouse to use up his/her RRSP space.

Toque.

[Goldielocks]

FrugalT --

One thing to consider, if you add to a spousal RRSP, is to wait over 3+ years (no new additions), then your wife withdraws it at her tax rate.    You can do this long before you retire.   e.g., contribute one year and get rebate at your marginal tax rate, wait 3-4 years, she withdraws at $20k/yr or so.   Repeat.

It is a great way to achieve a small amount of income splitting for a single high income earner in the family.

I realized this strategy too late, after I had already dropped my income and DH increased his.