Win-win financial situation with spousal RRSPs

Mind, Body, and Soul is sponsored content from Fresh Ground Financial.

My son Wyatt has recently been telling me and Amy (my wife) all the things that are dirty and need cleaning in our house. While it’s frustrating to constantly be reminded that we can’t keep up with our housework, his awareness of our ineptitude has become a real advantage for us. Every time he shows us something that needs cleaning, we suggest he do it.

Surprisingly, he takes us up on that offer often. Not always, but enough to make our life easier. 

Now, our house tasks are being completed, our messes are being cleaned but we’re not always the ones doing them.  

Talk about a Win-Win Situation.

What does this have to do with money?

Well, the Spousal RRSP is the Win-Win Situation of dealing with your taxes.

We all must pay our taxes, but lots of people do not want to. So instead, they save money through an RRSP to get a reduction on their tax bill.

The problem is if you do this, you have not actually reduced your taxes, you’ve just postponed them. Once you decide to withdraw money from your RRSP, – say as a replacement of your income in retirement - you’ll be hit with the tax bill at your current tax rate, which often ends up higher than people think.

Let’s call this a win now – lose later situation.

But if you’re a single income, or close to a single income family, you can turn this into a Win-Win Situation simply by contributing to a Spousal RRSP instead of a personal RRSP.

Your household’s major income earner can contribute to a Spousal RRSP. In doing so, they will get a tax break upfront, just like a personal RRSP. However, after 3 years your household’s stay at home or part-time working partner can withdraw the money from their Spousal RRSP at their significantly lower tax rate. Once the money is withdrawn, it can be added to a Tax-Free Saving or Investment Tool to grow into tax-free retirement income for you in the future.

One Great Example: 

George earns $100,000 annually and his tax rate is roughly 30%. His wife Alisha stays at home with their 3 children.

George contributes $10,000 to a Spousal RRSP for Alisha. This gives him a tax reduction of $3,000 that year.

3 years later, Alisha withdraws $10,000 from her Spousal RRSP as income. She will pay roughly $500 in taxes on that income, leaving her with a net income of $9,500.

$3000 tax reduction - $500 tax payment = $2500 tax savings.  

Now Alisha can contribute that $9,500 to a Tax-Free account and invest it for her future. Her contribution and all the interest earned will be withdrawn tax-free.

Just like in my opening story where our house is being cleaned up without us having to do the work, your taxes will be cleaned up - and you’re going to save and have more money - without paying them yourself.

Win-Win Situation!

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Written by Brendan Peters, of Fresh Ground Financial.