While an RRSP and TFSA both allow you to save money and reduce taxes now or in the future, each has unique features to consider when contributing to a spouse’s registered savings account.
The chief advantage driving contributions to spousal registered savings accounts is to minimize taxes owing down the road when you each retire by splitting potential taxable income in two.
Ideally, the smaller amounts withdrawn from each spouse’s registered savings vehicles will result in lower taxes compared with one large withdrawal each year from a single account.
Outside of those with their own businesses, income splitting opportunities for most couples are rare, so this is a strategy worth considering. The rules, however, are not the same for registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).
Contributing to a Spousal RRSP
First, it’s important to know that Canada Revenue Agency (CRA) recognizes common-law partners as spouses (including same-sex partners). Second, a spousal RRSP is one owned and held only by your spouse, not by you.
CRA allows you to contribute to your spouse’s RRSP, but those contributions count towards your annual contribution limit. The contributing spouse (you, for example) then deducts the contribution from your taxable income. Your spouse is not able to use this tax deduction.
It’s also worth noting that if you are beyond the age to contribute to your own RRSP, you can still contribute to your spouse’s RRSP until the end of the year he or she turns 71. It’s also good to know you cannot simply transfer from your own RRSP to your spouse’s.
As might be expected, withdrawals are handled differently. if a withdrawal is made within three calendar years of a contribution, some or all of the withdrawal will likely be taxed in the hands of the contributing spouse. CRA has formulated rules to calculate how much is included in each spouse’s income for the year. Otherwise subsequent withdrawal from a spousal plan is taxed in the hands of the account owner (your spouse).
Consult with your advisor, however, since the value of a spousal RRSP can be affected by pension plans, inheritances, post-retirement investment income and other income sources.
Contributing to a Spouse’s TFSA
There is no such thing as a spousal TFSA. Unlike a spousal RRSP, it is your spouse’s available TFSA contribution room that limits how much money you can contribute.
CRA is not concerned with the source of your spouse’s TFSA funds since it is money that has already been taxed in the contributor’s hands.
As with any TFSA contribution, there is no tax credit to be claimed by either spouse, but the money grows tax-free and can be withdrawn at any time tax-exempt. While this is not purely an income-splitting strategy, a spousal TFSA contribution is a very effective tool for asset transfer and growth.
Again, consult with your advisor to determine the best uses for RRSPs, TFSAs and spousal contributions based on your own situation, goals and finances.
Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.
Bruce Shepherd is a financial advisor with Edward Jones. This article is provided for information purposes only.