Spousal RRSPs Saves Taxes

Spousal RSPs have a few moving parts. So let’s work to understand the concept!

Hi everybody, this is Cory back in the Coach’s Hangout. As always, if there’s something you would like us to cover, you can send in a request using the form found in your student account. From time to time, we will stop by and leave some helpful content, and we may even answer your question. Here at SeeWhy Learning, we love interacting with our students. In fact, it’s the very reason that we created this Coach’s Hangout series.

This week, we received a submission from a student who was convinced that there was an error in one of our questions. Now I think we are pretty good, but we are not perfect. So, of course, I looked into it right away. Well, it turns out the question is right, but the student was making a very common mistake and I don’t want you to make the same mistake on exam day. So here is the question that she wrote in about, as you will see, it is a Spousal RRSP question. Now, Simon has total contribution room of just $5,000. So, the student immediately eliminated answers B and D because in those answers, the total contributions going into his RRSPs exceed $5,000. Now, if you would’ve made the same mistake, you’re not alone. So let’s clear up the confusion.

I think we’ve done a really good job of teaching spousal RRSPs in the study guide and in the video lessons. So, I’m not going to recreate the wheel here. For this Coach’s Hangout, I’m going to assume that you have a general understanding of the concept. I really just want to focus on one important point that a lot of students miss. For a moment, let’s consider the tax issue that Sarah and Simon could face in retirement if they both contributed their own respective limits into their own RRSPs. If each year Sarah contributed $10,000 to her RRSP and Simon contributed only $5,000 into his own RRSP, look what would happen in retirement. Sarah’s RRSP account would likely be at least twice as big as Simon’s. What that means is in retirement, Sarah would probably have to withdraw twice as much as Simon to fund their lifestyle and this would put her in a much higher tax bracket than Simon.

From a tax perspective, it would be much better if they structured their contributions in such a way that they would have more or less equal RRSP balances in retirement and were able to withdraw equal amounts in retirement. A spousal RRSP can help them achieve that. So, with all this in mind, let’s circle back and tackle the question. All right. The question is asking us how Sarah and Simon should structure their RRSP contributions to minimize taxes in retirement. Okay. Remember the three key points for spousal RRSPs that you learned in the study guide.

Number one, they allow you to create similar sized, registered savings accounts. Number two, the contributor gets to choose what to do with his or her own contribution room. And number three, the contributor gets the contribution receipt. Let’s see if we can use these to narrow down the answer choices.

Answer A: Sarah contribute $10,000 to her own RSP and Simon should contribute $5,000 to his own RSP. Well, this is possible as both are using their full contribution room for their own RRSPs, but structuring it this way would probably result in them having different amounts saved up by the time they retire. So, Sarah may have to draw more from her RRSPs than Simon, putting her in a higher tax bracket and given what we’re being asked, this isn’t a great answer.

Answer B: Sarah should contribute $7,500 to her own RRSP and Simon should contribute $7,500 to his own RRSP. Sure, this would result in Sarah and Simon having similar amounts saved in their RRSPs, but in this one, the students bang on. It’s just not possible. We can get rid of answer B because Simon can’t contribute more than $5,000 into his own RRSP. He just doesn’t have enough contribution room.

All right. Two answers down and we still haven’t found a good one. Let’s take a look at answer C. Sarah and Simon should contribute $5,000 each to their own respective RRSPs. Well, this is possible too, and it would result in them having similar amounts saved up in their RRSPs, but Sarah would still be leaving a lot of contribution room on the table, so this isn’t exactly a perfect answer either.

All right, finally answer D. Sarah should contribute $7,500 to her own RRSP and $2,500 to Simon’s spousal RRSP. Simon should contribute $5,000 to his own RRSP. Remember, this is the one that the student was sure was wrong because it results in Simon getting more than $5,000 into his RRSPs. So, let’s take a closer look.

So let’s take a closer look.

Like with so many other concepts, spousal RRSPs have a few moving parts. So, work to understand the concept by using all of the SeeWhy tools, doing lots of practice and studying those answer keys.

Thanks for dropping by the Coach’s Hangout everybody and good luck on your exam.