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What's the benefit of a spousal RRSP?

Since a spousal RRSP lets you shift assets to your spouse, it may let you reduce your family's total tax bill during retirement.

The reason for using a spousal RRSP is to split you and your spouse's income more evenly in retirement so that more income is taxed in the lower-income spouse's hands. This may reduce total family taxes because taxes rise as income increases.

However, there could be some negative tax implications with this strategy. If your spouse has a higher income in retirement, it will affect eligibility for the age credit, or may trigger the clawback on Old Age Security.

Example

If you have income of $50,000 a year in retirement and your spouse has income of $20,000, your total family income will be $70,000. If you have shifted assets to a spousal RRSP so that both you and your spouse end up with retirement incomes of $35,000, your family's total tax bill will be less -- even though your family's total income would also be $70,000.

There are two main benefits of contributing to an RRSP. You receive an income tax deduction when you contribute, and the earnings on your RRSP investments are sheltered from tax all the years they remain in the plan.

If you contribute to a spousal RRSP, you receive the income tax deduction on the contribution. Your spouse owns the spousal RRSP.

For every dollar you contribute to a spousal RRSP, you reduce by an equal amount what you can contribute in your own RRSP. If your RRSP contribution limit for the year is $10,000, you might decide to put $5,000 into your own RRSP and $5,000 into a spousal RRSP.

Before putting money into an investment, or using a tax strategy, consider seeking professional advice.