Valentine’s Day is quickly approaching. I better not forget it this year. Last year was not a good scene. I was so focused on other things that I forgot to buy Carolyn flowers, chocolates, or anything else. Even when I do remember to buy her things, I generally mess it up. Two years ago, for example, she didn’t exactly appreciate the glass heart made out of recycled glass bottles and pottery. I was trying to be eco-friendly but she felt that, on the romantic meter, I had hit rock bottom and was digging deeper.
After much thought, I’ve decided this year to give her the gift of money. No, not a gift card – there’s no romance in that. I’m talking about a contribution to a registered retirement savings plan. Forget diamonds, she’s going to appreciate it when I get that tax refund from the contribution to her spousal RRSP. Yup, I’m going all out this year. Let me share a little more about spousal RRSPs.
A spousal RRSP is simply a plan that you contribute to, but your spouse owns. Making contributions to a spousal RRSP provides you, the contributor, with a tax deduction provided you have sufficient RRSP contribution room, but your spouse will pay the tax on the withdrawals from the plan.
In a perfect world, you and your spouse will have equal incomes in retirement. This ensures that you are paying the least tax possible as a couple. A spousal RRSP can help to equalize your incomes in retirement when you are currently the higher income earner.
If your spouse is younger than you, you’ll also be glad to know that the maturity deadline for the spousal RRSP is based on the age of your spouse. So, even when you can no longer contribute to your own RRSP (after the year in which you reach age 71) you may still be able to contribute to a spousal RRSP.
It’s good to know that RRSPs in general can provide creditor protection. Federal bankruptcy laws were amended in 2008 to ensure that RRSPs and registered retirement income funds (RRIFs) are protected from creditors, with the exception of contributions made within 12 months of the date of bankruptcy. Further, insurance-type RRSPs provide protection under the insurance legislation of each province. A spousal RRSP may provide an additional sleep-at-night factor since the assets are owned by your spouse and not you. I should mention that there is fraudulent conveyance legislation that could expose your RRSP contributions to creditor claims in certain situations, so legal advice may be necessary.
The three-year rule
It’s possible that withdrawals from a spousal RRSP will be taxed in your hands, and not your spouse’s, due to the “three-year rule.” This rule says that any withdrawals will be taxed in your hands to the extent you made a contribution to a spousal RRSP in the year your spouse makes a withdrawal or the previous two years. You can’t escape this rule by opening more than one spousal RRSP account since the rule will apply even if your spouse makes a withdrawal from a different spousal RRSP account than the one you contributed to. If the spousal RRSP is converted to a RRIF, the minimum withdrawals required are not subject to the three-year rule, but excess withdrawals could be.
To minimize the impact of the three-year rule, try your best to project when your spouse might need to make withdrawals, then consider contributing to your own plan, rather than a spousal plan, in that year of withdrawal and the previous two years. Also, consider making spousal RRSP contributions by Dec. 31 each year rather than the usual RRSP deadline (Feb. 29 this year). This will shorten the time your spouse must wait before making withdrawals that will avoid the three-year rule. For example, if you contributed to a spousal plan on Dec. 31, 2011, your spouse can make withdrawals as early as Jan. 1, 2014 and avoid the three-year rule. If you contributed one day later on Jan. 1, 2012, your spouse will have to wait until Jan. 1, 2015 to avoid the three-year rule.
There are a couple of final points worth noting. First, it’s not possible to contribute your retiring allowance to a spousal RRSP for your spouse – those dollars will have to go into your own RRSP. Second, if your spouse has dollars to contribute to an RRSP, he should set up his own RRSP rather than contributing to the spousal RRSP, otherwise those dollars will become “spousal RRSP” dollars subject to the three-year rule.