When A Spousal RRSP Makes Sense

With RRSP season behind us and a new contribution year ahead, I took a look at our projected registered contributions for the year and noticed something that can potentially be out of alignment.

As everyone reading this should be aware, this is a blog about early retirement. As such, the goal is to have a comfortable nest egg built up and retire by the time wifey and I are 48.

For the years between 48 and 60. We plan to draw down our RRSP balances to $0. As such, we'd like to minimize the potential tax hits by withdrawing equal amounts each year to cover our expenses. Approximately, $14,000 each or $28,000 total.

However, after filing wifey's tax return, I noticed that she will have $0 in contribution room for 2018. Why is that? Well, last year, she was on maternity leave due to the birth of our first child. She received a top up throughout the year to supplement income from EI that generated RRSP room. However, EI income is exempt from the RRSP room calculations. As such, she only generated $10,000 or so in contribution room.

However, in addition to that, my wifey has a defined benefit pension plan through her workplace. One program they have for people returning from parental leave is the ability to "buy back" the portion of pension they would have contributed had they been working full time and not on leave. As a result, wifey's "buy back" and pension contributions and ensuing Pension Adjustment for 2018 essentially wiped out all RRSP room.

The first two months of the year, we contributed to the RESP and maxed out our TFSA contribution room for 2018. Now that we've filed our taxes, we have an idea where our money needs to go.

For 2018, I still have a least $20,000 in contribution room remaining. Most of this room was earned when I was younger and because my salary isn't as high as wifey's, we mainly threw all of the extra money into her RRSPs. However, with her RRSPs maxed out, that leaves mine.

The problem? If I contribute the entirety of the $20,000 this year (and the extra room I earn in subsequent years) into my RRSP, moving forward, my RRSP balance will be much greater than wifey's. That wouldn't be a problem when we retire at 60 or 65 as she'd have a defined benefit pension to supplement the income from RRSP withdrawals. However, if our goal is to retire at 48, she wouldn't be able to tap into her defined benefit pension for another 7 years (minimum age to begin pension is 55).

So what can we do?

Well, this is where a Spousal RRSP comes into play.

What is a Spousal RRSP?

From my understanding, it's an RRSP where one spouse contributes to an RRSP on behalf of another spouse. The spouse who contributes gets the tax receipt, but the money now belongs to the spouse who owns the account. Essentially, it's a form of income splitting. There are special rules to withdrawing the money. If the money is taken out within 2 years, the income is attributed to the contributing spouse and not the spouse that owns the account. I've read some sites talk about 3 years. I don't really know as it shouldn't apply to us if we withdraw from wifey's RRSP first before we dip into the Spousal RRSP when we're retired.

Generally speaking, this tool is promoted by most financial professionals as a way for the higher income earning spouse to contribute to an RRSP of the lower (or no) income earning spouse.

However, as I mentioned before, in our situation, wifey is the higher income earning spouse. However, she doesn't have much in terms of RRSP room and we need to even the balances moving forward.

Fortunately, Questrade has Spousal RRSP accounts in addition to regular RRSP accounts. All I did was submit an application to open an account for wifey, have her sign some documents, and added some funds. Two business days later, the account was open.
Wifey's new SRRSP account
"Balancing" her RRSP account was as simple as using a spreadsheet to combine the accounts and see what I needed to purchase to bring her asset allocation to our target.

Of course, due to the increased price of stocks since last March (her last RRSP contribution), a $1,000 contribution wasn't enough to bring the portfolio back to our targeted allocation. However, further contributions will do it. 

Along with a hefty contribution I made to my RRSP account, wifey's account balance is currently only $4,000 greater than mine. When my tax return is deposited into my bank account, the gap will be narrowed further.


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