The appeal of RRSP contributions for many Canadians is reducing their tax payable and enhancing their tax refunds. Spousal RRSP contributions can further enhance the effects of contributing to RRSP by further reducing income tax payable through the effects of income splitting. Spousal RRSP are particularly effective for families where one spouse doesn’t work or one spouse income is lower than the other. Spousal RRSP can also be effective should one spouse have significant pension benefits through their employer and the other partner does not.
Contributions made to Spousal RRSP contribute to reducing the tax payable of the contributor, while being paid into an account of the lower income earner. Investment gains will continue to accrue tax free in the name of the account holder and lower income earner. When funds are withdrawn from the RRSP (usually by way of RRIF), they will be taxed as income in the hands of the lower income earner and account owner. In effect, during income earning/generating years, the higher income earner benefits from lower income tax rates, while in retirement income is split between both spouses, further reducing overall tax payable in retirement.
Before contributing to an RRSP, consult with an investment specialist and advisor to understand which RRSP structure is most effective for your family situation. Spousal RRSP can have both the benefits of reducing income taxes payable during income bearing years and further reducing taxes payable in retirement.
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