A brief look at how individual, spousal and group RRSPs work.
The most common type of RRSP is an individual plan that you open for yourself. If you are married or have a common-law partner, you can also open a spousal RRSP. Another option is joining a group RRSP if your employer offers this type of plan.
1. Individual RRSP
An individual RRSP is an account that is registered in your name. The investments held in the RRSP and the tax advantages associated with them belong to you.
2. Spousal RRSP
A spousal RRSP is registered in the name of your spouse or common-law partner. They own the investments in the RRSP, but you contribute to it. You get the tax deduction for any contributions you make to a spousal RRSP. Any contributions you make reduce your own RRSP deduction limit for the year. They won't affect how much your spouse can contribute to their own RRSP.
A spousal RRSP is a way for you and your spouse to split your income more evenly in retirement. That means the combined income tax you pay as a couple may be lower than what you would pay if all your savings were in a single RRSP. You may want to do this if you earn more money than your spouse and you're likely to be in a higher tax bracket when you both retire. Or if you have a pension plan and your spouse doesn’t.
To qualify for a spousal RRSP, you must:
have lived together as a couple for at least 12 months,
have a child together by birth or adoption, or
share custody and support of your partner’s children from a previous relationship.
If your spouse takes out money you have contributed:
within 3 years of the contribution date – you'll have to pay tax on the withdrawal amount
3 years after the contribution date – your spouse will pay tax on the withdrawal amount.
If your relationship ends:
if you are married – spouses generally have to divide assets equally
if you are living common-law – consider drafting a joint agreement to cover this situation as assets may not necessarily have to be divided equally.
Spousal RRSPs are used to equalize retirement income and minimize tax. It doesn't make sense to open a spousal RRSP if your spouse's income will be roughly equal to yours when you retire.
3. Group RRSP
Some employers offer group RRSPs as a benefit to help employees save for retirement. You open an individual RRSP, but you contribute to it through your employer. The RRSPs of all of the employees are held at the same financial institution. Here's how it works:
Your plan contributions are usually automatically deducted from your pay. Your employer may match or add to your contributions.
Your employer usually pays the costs of opening and managing the plan. You pay any investment costs.
The range of investment options is usually limited, depending on where the group RRSP is held.
The rules for when and how much money you can take out of the plan vary depending on your employer.
Understand how your particular group RRSP works. The choices and rules vary depending on your employer and where the plan is held. Learn more about group RRSPs.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca
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