Save Money On Your Taxes– Use A Spousal RRSP

by Pam on February 3, 2010

 

 

 

 

If you anticipate that your spouse’s income will be considerably lower than your own during retirement, a great way to save money on your tax bill is to take advantage of a Spousal RRSP.  It’s a simple and strategic way to split your income.

How does a Spousal RRSP work?

The higher income-earning spouse contributes to the Spousal RRSP and gets to claim the tax deduction.  The money in the plan then accumulates free of tax until it is withdrawn by the other spouse (the lower income earner), which will result in tax savings.

What you should know about Spousal RRSPs:

If you are the plan owner and your spouse is contributing into your Spousal RRSP, if you withdraw money from the plan, any money contributed in the last 2 calendar years as well as the current year will impact your spouse’s taxes.  In other words, your spouse’s taxes will end up being impacted.  So, it would not be advisable to start up an RRSP unless you are certain you won’t have to withdraw the funds in the short term.  (Before investing in an RRSP, it’s important to have an emergency savings account set up so that in the event of an unexpected expense, you wouldn’t be depending on RRSP money.)

Another important thing to understand about Spousal RRSPs is that the contributing spouse’s contribution room is being used up regardless of whether or not the money is going into a regular RRSP or a Spousal RRSP.  So, if the contributing spouse has $15,000 of contribution room and he/she contributes $10,000 into his/her own RRSP, then he/she will be able to contribute up to $5,000 into a Spousal RRSP.

It’s important to be proactive in finding ways to reduce your income tax.  A Spousal RRSP might be beneficial for you, especially if one spouse earns significantly more than the other.  I would highly encourage you to check out this option as wise tax planning now will set you up for a more financially sound future.

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