Spousal registered retirement savings plans (RRSPs) are an excellent way for plan sponsors to add value to employees’ compensation package—but too often are bypassed due to misconceptions about cost and administration.
“You really are supporting your employee because you’re allowing them to take advantage of a beneficial income tax strategy now and in retirement,” says Jackie Nicholls, Director, Group Retirement Services, Acera Benefits in St. Albert, Alberta, a member firm of Benefits Alliance. “By helping the spouse, you’re also helping the employee.”
What about the cost and administration?
First, the insurance carrier handles the administration of spousal RRSPs, says Nicholls. Regarding cost, a common misconception is the plan member is “double dipping”—that is, the employee and the spouse (or common-law partner) both receive an employer contribution. In fact, the employer’s matching amount remains the same. The employee decides how to split that contribution between their own account and their spousal account.
“From an employer perspective there is no additional cost because the employee is receiving the same matching amount,” says Nicholls.
With concerns about cost and administration put to rest, plan sponsors can focus on communicating the benefits of spousal RRSPs to their employees and educating them about how they work.
The tax benefit
Spousal RRSPs reduce the amount of tax couples pay in retirement by allowing them to split their income. This can also lessen the likelihood that income-tested government benefits, such as Old Age Security, will be deducted from the income of the higher-earning individual.
Keep going after age 71
What many employees don’t know is that they can continue to contribute to their spousal RRSP after they turn 71 and they’re still working, provided the spouse is younger than 71. “That keeps them in the plan and receiving the employer’s contribution,” says Nicholls.
“If they continue to work after age 71 and the spouse is 10 years younger, for example, this can be very advantageous,” continues Nicholls, as it can yield up to 10 more years of contributions. Plus, the income from the spousal RRSP can be postponed until the year after the spouse’s 71st birthday.
Educate about withdrawals
Attribution rules dictate that if a spouse withdraws from their spousal RRSP within three years of the employee’s last contribution, the amount is added to the employee’s taxable income. This rule is intended to prevent couples from immediately withdrawing contributed funds after capitalizing on the tax deduction.
Thus, it’s best to advise employees to make spousal contributions throughout the calendar year, rather than in a lump sum close to the contribution deadline, to reduce the time between the contribution and three-year waiting period.
One deduction limit
Remind employees that their contributions to a spousal RRSP count towards their annual RRSP deduction limit. Going over this limit will result in a penalty.
After death
While spousal RRSP contributions cannot continue to be made to a deceased plan member’s RRSP, Canada Revenue Agency does allow for the deceased person’s legal representative to make contributions to the surviving spouse’s RRSP for the duration of the year of death or during the first 60 days of the following year.