If you’re a practicing physician who’s paid a salary, you’re probably familiar with Registered Retirement Savings Plans, or RRSPs. But have you considered how a Spousal RRSP might fit in your plans? Tax Planning for Salaried Physicians: Should I contribute to a spousal RRSP?
While an RRSP account can help you save for retirement, a Spousal RRSP may provide additional benefits to you as a couple both before — and in — retirement. How Tax Planning for Salaried Physicians is done.
Understanding the differences between a regular and a Spousal RRSP
- Regular RRSPs. You are the owner of the account and the contributor when you open a normal RRSP for yourself. This implies that when you make a donation to the account, you can deduct those contributions from your taxes. When you take money out of the account in retirement, it is added to your taxable income, and you are then responsible for paying any taxes that may be due.
- Spousal RRSPs. When you contribute to a Spousal RRSP account, you still get the tax deduction, but the plan is in your spouse’s or common-law partner’s name. For physicians, it may be a great income-splitting option if one of you earns more than the other. Just like with a regular RRSP, you are the contributor to the account. However, unlike a regular RRSP, your spouse or common-law partner is the owner of the funds in the Spousal RRSP account — and when those funds are withdrawn, they pay any tax owing.
How a Spousal RRSP may benefit households
Because of Canada’s graduated income tax system, when one spouse or common-law partner has a higher income than the other, the higher-earning individual usually pays tax on their earnings at a higher rate.
For example, if you’re a practicing physician earning a high salary, you may pay tax at rates as high as 50% or more, while your lower-earning partner may pay 30%. And a spouse or partner not earning employment income may be paying no income tax at all.
If you and your spouse or common-law partner have significantly different incomes, it can make sense to set up a Spousal RRSP, so that the higher-earning individual contributes to an RRSP for the lower-earning individual. That way, as a household, you can take advantage of the different tax rates while working and in retirement.
Here’s how a Spousal RRSP can work for medical professionals:
Before retirement: Sarah and Jerome
- Jerome, Sarah’s common-law partner, is a sessional university lecturer with a top tax rate of 30.5%, while Sarah’s salary as a physician is taxed at 54%.
- Jerome will receive a tax deduction of $305 if he makes a $1,000 contribution to his own RRSP (30.5% x $1,000).
- In accordance with her 54% tax rate, Sarah would receive a tax deduction for her $1,000 contribution to Jerome’s Spousal RRSP. Sarah would receive a tax refund of $540 on the identical $1,000 contribution, according to this.
- Although Sarah’s tax refund is unchanged, Jerome will pay taxes on his withdrawals from the Spousal RRSP as a result of her contribution.
In retirement: Sarah and Jerome
- The pair have about equal amounts in their RRSP accounts since Sarah utilized some of her RRSP room and her greater earnings to make contributions to a Spousal RRSP account for Jerome.
- They will therefore pay less in taxes overall when they take money from those accounts in retirement because they will each be taxed separately.
- Sarah and Jerome can each take $2,500 out of their own RRSP accounts each month rather than paying tax on $5,000 from Sarah’s RRSP each month.
- This “evens out” their incomes due to Canada’s progressive tax system, resulting in greater tax efficiency than if all RRSP withdrawals came from a single account.
Is a Spousal RRSP right for my household?
In the right circumstances, incorporating Spousal RRSPs in your household tax and retirement planning may make sense. Many medical professionals open up a separate Spousal RRSP account to make it easier for recordkeeping. However, a regular RRSP account becomes a Spousal RRSP account when a spouse or common-law partner makes a contribution to it.
If you’d like to learn more about whether you can benefit from Spousal RRSPs or how to open a Spousal RRSP account, talk to Abdullah CPA
