Spousal Registered Retirement Savings Plans are an important tax-planning tool. An RRSP is designated as spousal when one spouse contributes to a plan in the other spouse's name.
Spousal RRSPs will appeal to couples where one spouse earns a higher income than the other spouse, and is therefore in a higher tax rate bracket. By contributing to a spousal RRSP, the spouse earning a higher income will receive a tax deduction at the higher tax rate. For example, a higher income spouse in a 40 per cent marginal tax bracket, contributes $4,000 to a spousal RRSP and saves $1,600 in taxes. If the lower income spouse, in a 20 per cent marginal tax bracket were to contribute $4,000 to an RRSP, this spouse would save only $800 in taxes - a difference of $800.
At the same time, this higher income spouse is creating a pool of funds for the lower income spouse to draw on at retirement. When the couple retires, they both have funds to withdraw from their own RRSPs as two separate incomes. So, they can both be taxed at a lower rate than if only the higher income spouse was withdrawing all of these funds as one individual income.
In this way, spousal RRSPs allow couples to income-split, and take advantage of Canada's progressive tax system. This means that it is more beneficial to have two individuals earning $40,000 per year than one earning $80,000. For example, in Ontario two individuals earning $50,000 per year would pay approximately $20,000 in total income taxes, while one individual earning $100,000 would pay approximately $28,000 in taxes.
Of course, income-splitting only works if one spouse stays in a tax rate bracket that is the same or lower than the other spouse.
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