Registered retirement savings plans (RRSPs) are an important tool for Canadians to save for their retirement while potentially reducing their tax burden. One question, among a few, to consider is whether they can transfer their RRSP to their spouse. While this may seem like a simple solution to equalize retirement savings, there are some important tax implications to consider.
A spousal RRSP is a great option for equalizing your retirement savings and to take advantage of lower marginal tax rates. In this article, we’ll answer some questions about if you can transfer your RRSP to your spouse, and why a spousal RRSP can be a much better retirement saving strategy for you.
Can my RRSP account be transferred to my spouse?
No, but with specific exceptions for a breakdown in marriage or common-law partnership. In which case, you would have to use a T2220 form | PDF 33.9kb from the Canada Revenue Agency (CRA). You can only do a direct transfer of funds from one RRSP to another RRSP that you own. Otherwise, it is not possible.
When you contribute to your RRSP account, you receive a tax deduction on the contribution amount. The idea is that the money will be taxed when it’s withdrawn from the account, presumably during retirement when your income and tax rate may be lower. When you transfer your RRSP to your spouse, it’s essentially like withdrawing the funds and then gifting them to your spouse, which would trigger significant tax consequences.
When you withdraw from your RRSP, the entire amount is subject to taxation at your marginal tax rate and triggers withholding tax. This means that if you’re a high-income earner and you transfer your RRSP to your low-income spouse, the tax hit may be significant for you as that higher income earner.
Additionally, if the transferred RRSP funds are not immediately reinvested into an RRSP or other registered account like a registered education savings plan (RESP) or tax-free savings account (TFSA), your spouse could experience long-term tax implications.
Can I move funds from my RRSP to my spouse’s RRSP?
No. You can’t move funds from your RRSP to your spouse’s RRSP. Funds in your RRSP can’t be moved to another RRSP that does not have the same annuitant as the RRSP where the funds are coming from. If you’re the owner of both accounts, then you can do a direct transfer between both accounts.
Can I give or transfer my RRSP to my spouse after death?
Yes, it’s possible to transfer your RRSP to your spouse after your death. When you die, your RRSP will be considered as a taxable disposition and the full value of the account will be included as income on your final tax return. In this instance, you would use the T2019 form | PDF 42.9kb from the CRA website.
If you name your spouse as the beneficiary of your RRSP or via a will, they will be able to receive the remaining balance of your account tax-free as a spousal rollover. This means that the funds will be transferred to your spouse's RRSP or RRIF and will be treated as if they had contributed to the account themselves.
The beneficiary will also receive the full market value at the date of death with the tax obligation arising in the estate and paid by the estate. Alternatively, if you name a non-spousal beneficiary, such as a child or other family member, the balance of your RRSP will be distributed to them as a lump-sum payment.
It’s important to note that the rules surrounding RRSPs can be complex, and the tax implications of transferring funds after death can vary depending on individual circumstances. As such, it may be helpful to speak with an advisor to understand the best way to structure your estate plan and ensure that your wishes are carried out in the most tax-efficient way.
Why is a spousal RRSP a better option?
A spousal RRSP is a retirement savings plan that allows you to contribute to the RRSP of your partner. This option is usually a better strategy than transferring an RRSP to your spouse because it provides many benefits. Some of these benefits include:
- You will have more control and flexibility over your retirement savings.
- You decide when you withdraw the funds subject to the RRSP withdraw rules.
- You can potentially withdraw the funds in a period when you have a lower tax rate.
- The contributions are tax deductible from your income.
- You can reduce your overall tax liability by income splitting.
- You and your spouse can both build up retirement income quicker.
Overall, a spousal RRSP is a better option for couples looking to manage their retirement savings in a tax-efficient manner while maintaining control over their funds. It’s important to work with an advisor if you’re considering a spousal RRSP so that you and your spouse can get that personal touch on your retirement saving strategy.