The most common type of RRSP, otherwise known as Registered Retirement Savings Plan is an individual plan that you open by yourself. If you are married or have a common-law partner, you can also open a spousal RRSP. You can also opt-in to contribute to a group RRSP sometimes offered by employers as a form of employee benefit package.
1. Individual RRSP
An individual RRSP is an account that is registered in your name. The investments held in the RRSP and the tax advantages associated with them belong to you.
You can choose to build and manage your RRSP investment portfolio yourself with a self-directed RRSP or work with a financial advisor.
2. Spousal RRSP
A spousal RRSP is registered in the name of your spouse or a common-law partner. They own the investments in the RRSP, but you contribute to it. You get the tax deduction for any contributions you make to a spousal RRSP. Any contributions you make reduce your own RRSP deduction limit for the year. It won’t affect your spouse’s contribution room to their own RRSP.
A spousal RRSP is a way for you and your spouse to split your income more evenly in retirement. That means the combined income tax you pay as a couple may be lower than what you would pay if all your savings were in a single RRSP. You may want to do this if you earn more money than your spouse and you’re likely to be in a higher tax bracket when you both retire. Or if you have a pension plan and your spouse doesn’t.
To qualify for a spousal RRSP, you must:
- have lived together as a couple for at least 12 months,
- have a child together by birth or adoption, or
- have a shared custody or support your partner’s children from a previous relationship.
If your spouse takes out money you have contributed:
- within 3 years of the contribution date – you’ll become liable to pay tax on the withdrawal amount
- 3 years after the contribution date – your spouse will be liable to pay tax on the withdrawal amount
If your relationship ends:
- if you are married – spouses generally have to divide assets equally
- if you are living common-law – consider drafting a joint agreement to cover this situation as assets may not necessarily have to be divided equally.
Spousal RRSPs are used to equalize retirement income and minimize tax. It doesn’t make sense to open a spousal RRSP if your spouse’s income will be roughly equal to yours when you retire.
3. Group RRSP
Some employers offer group RRSPs as a benefit to encourage employees to save for their retirement. You open an RRSP through your employer Group RRSO. All of the employees’ RRSPs are held at the same financial institution. Here’s how it works:
- Your plan contributions are usually automatically deducted from your pay. Your employer may match or add to your contributions.
- Your employer usually pays the costs of opening and managing the plan. You pay any investment costs.
- The range of investment options is usually limited, depending on where the group RRSP is held.
- The rules for when and how much money you can take out of the plan vary depending on the conditions your employer sets when opening the Group RRSP.
It is important to understand how your particular group RRSP works. The choices and rules vary depending on your employer and where the plan is held. Learn more about group RRSPs.
Consider opening a spousal RRSP if you are the main breadwinner. Being able to make equal withdrawals when you retire will save you from overpaying in taxes and will enable you to make your hard earned money work for you longer.
Benefits of Group RRSP
The benefit of contributing to your employer’s group RRSP is that often the employer will match your contributions up to a certain amount and you may be relieved from having to pay some of the plan’s administration fees.