The ABCs of Spousal RRSPs

Jan 30, 2024

A spousal* RRSP is exactly what it appears to be, quite simply a Registered Retirement Savings Plan (RRSP) for a spouse; a plan that cannot only help set aside funds for you and your spouses’ retirement, but can save you some tax dollars in the process. The idea is that one person, typically the higher earner, contributes money to the spousal plan on behalf of their spouse. The primary benefit is that a contribution can be made each year and the receiving spouse will see a tax- free return until those assets are withdrawn.

A spousal RRSP is typically utilized when one spouse has significantly more money in their RRSP than the other. By splitting the invested amount between an RRSP and a spousal RRSP, both of you can enjoy retirement dollars and pay less tax overall by withdrawing the funds when you are both in a lower tax bracket.

Let’s see how this works – Assume you earn $100,000 and your spouse earns $50,000. With RRSP contribution limits of 18%, you can deposit $18,000 and your spouse can deposit $9,000 to your respective RRSPs. However, if using a spousal account, you can deposit, let’s say, $13,000 to your own account and $5,000 to the spousal account. Your total contribution is still $18,000, but divided over two accounts, allowing you to split the income with your spouse. Your spouse can still deposit their original $9,000 into their account.

The scenario becomes quite different without a spousal RRSP: let’s imagine that you have $1 million upon retirement and your spouse has $400,000 at this same time. A standard 5% withdrawal rate would result in taxable income of $50,000 for you and $20,000 for your spouse, with your $50,000 annual withdrawal taxed at a higher rate. If a spousal RRSP had been set up, both accounts could have accumulated $700,000 each (same total amount) and taken out an annual income of $35,000 per spouse, resulting in tax at a lower rate.

A spousal RRSP can also be used to save on taxes if one member of the couple is over 71 years of age but the other is not. When a spousal RRSP is opened, contributions can be made on behalf of the spouse who is not over 71 - and claim the income deduction on that deposit. In addition, spousal RRSP payments can still be made in the year of death.

It is worth noting that contributions to a spousal RRSP must remain in the fund for three calendar years from the year they are contributed or else the withdrawal amount will be added to your net income for that year and taxes will have to be paid at your tax rate.

*spouse includes a common-law partner

The contents of this publication were researched, written and produced by The Link Between (https://www.thelinkbetween.ca/) and are used by Echelon Wealth Partners Inc. for information purposes only

Disclaimers

Echelon Wealth Partners Inc.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them.

< Older Post Newer Post >

Lots of Bulls & Bears

06 May, 2024

Take your pick. There is no shortage of both good and bad news floating about the financial markets. To be fair, this is always the case. The hard part is understanding which side is stronger today and which side will be stronger tomorrow. With markets up low to mid-single digits following a very strong Q4 finish to 2023, most would agree the optimists are carrying the day at the moment. It is not just rose-coloured glasses; there is good news out there. Economic growth signs or momentum appear to be improving year-to-date. Dial back a few quarters, and the U.S. economy remained resilient while other economies softened or were rather lacklustre, including Canada, Europe, Japan, and China, to highlight some of the biggies. Today, while Canada is struggling, momentum in the U.S. has moved even higher, and there are signs of improvement in most jurisdictions.

Earnings Optimism

29 Apr, 2024

There are three things you should rarely ever bet against: the Leaf’s opposing team in the playoffs, the American consumer’s ability to spend, and corporate profits. As we are now about halfway through U.S. earnings season, once again, positive surprises remain the norm; 81% have beaten. It's a bit better than the 20-year average of 75%. The fact is that companies are good at managing analysts’ expectations. At least enough to beat them when the numbers hit the tape. The size of the positive surprises have been encouraging as well, at just under 10%. The highest surprise magnitude in some time. One of our reservations on the sustainability of this market rally over the past couple of quarters has been the flat earnings revisions. In other words, global markets are up over 20% but earnings estimates have remained flat or tilted down slightly. More often than not, markets trend in the same direction as earnings revisions. Earnings get revised up when companies raise guidance and/or analysts become more encouraged about growth prospects. That is a good thing for markets. Obviously, downward revisions are bad. Yet estimates have remained very flat as markets marched higher, a challenging combination.

Energy Stars Align

22 Apr, 2024

The oil market has been interesting lately and, to the surprise of many, has been the biggest silent outperformer this year. There is no shortage of geopolitical events to choose from that’s leading to a higher risk premium in oil with Brent breaking $90, whether it’s the Houthis missile attacks in the Red Sea leading to a massive re-route of trade, Ukraine’s drone strikes on Russian refineries, and the latest escalation between Israel and Iran leading to some news outlets using WWIII as click bait-y headlines. Given the run-up in oil prices, Canadian oil equities have clearly benefitted from the much higher torque. But there is a layer of even better news: The Transmountain Expansion (TMX) continues to look to be in operation by May, which would lead to much better pricing on the Western Canadian Select (WCS). With the current setup for the oil markets, some key questions that we often get from investors are: How sustainable is the rally in Canadian energy names? To determine if the oil equities are overstretched, we can look at the debt-adjusted cash flow (DACF) multiples of the major integrated oil names and see how the valuation has shifted in light of the recent oil move. From Exhibit 1, the DACF multiples for the Canadian integrated have been fairly range-bound over the last year, also in line with WTI, which has been in the $70 - $85 range. As a starting point, we can infer that the valuations of the companies have been commensurate with the movements in the underlying oil price deck and in line with where the equities should trade in the cycle historically over the last couple of years. Typically, in the commodities cycle, higher prices are usually coupled with lower multiples as market participants will usually price in lower normalized prices and vice versa, so a cause of concern would be if valuation starts trending towards the 6.5x – 7.0x+ area if oil prices continue to stay in the upper bounds of the $70 - $90 range or higher.