Why buy an RRSP?

There are many good reasons for contributing to a Registered Retirement Savings Plan (RRSP). First, your contribution is tax deductible—and the higher your marginal tax rate, the greater your tax savings. Second, the income generated by the plan is taxed only upon withdrawal from the plan (usually when you’re retired and possibly in a lower tax bracket). That means you can build up quite significant earnings inside your plan on a pre-tax basis. Finally, all or a portion of your annual eligible contribution may be contributed to a plan set up for your spouse or common-law partner.

Spousal plans

Setting up a spousal RRSP is a good idea if you expect your spouse or common-law partner to be in a lower tax bracket than you on retirement. When funds are withdrawn from the spousal RRSP, they are taxed in your spouse’s or common-law partner’s hands at his or her lower tax rate (this arrangement is subject to special rules to prevent abuse). This reduces your family’s total tax bill. This strategy also means that benefits such as the pension credit can be made available to both of you, and you may reduce your exposure to the Old Age Security (OAS) clawback (see topic 72).

Regardless of the pension income-splitting rules (see topic 71), spousal plans still have a role to play. Since the pension income-splitting rules limit the ability to income split to 50% of the amount received, a spousal RRSP may still allow for greater income splitting since 100% of the payments from the spousal RRSP can be taxed in the hands of the spouse with the lower income. Spousal RRSPs can also be useful in situations where the funds put aside are not always intended for retirement—for example, where both parties want to access RRSP contributions to purchase a home (see topic 63) and one spouse has not had sufficient income to benefit from making his or her own RRSP contributions.