Want to make the most of your savings in retirement with your married or common-law spouse? The trick here is not knowing to save, but knowing how to save. Which accounts make sense?

(Keep in mind, we're just going to cover the basics here…but if you need help, your advisor is just a call away.)

Spousal RRSPs

RRSPs are a popular retirement savings vehicle for many Canadians. Can you contribute to your spouse’s account? Sort of – but not exactly.

You can’t contribute to a spouse’s individual RRSP. That’s a no-no, leading to potential attribution penalties coming by way of a CRA audit.

But here’s the trick: you can contribute to a Spousal RRSP. And there might be a very good reason to do that.

Don’t think that 50 percent pension splitting is enough to fully split retirement income for you and your spouse? Is your employment and future retirement income expected to be significantly higher than your spouse’s? Or vice-versa? That’s when contributions to a Spousal RRSP could be a good idea.

Zakk and Ella show how income splitting with Spousal RRSPs works

Let’s imagine a nice, happy 30-ish couple, Zakk and Ella. They’re both gainfully employed and doing well for themselves, though their incomes are a little mismatched. After stints tending bar and running a coffee shop, Zakk finally followed his calling two years ago and became an art teacher at Ridgemont High.

He earns $60,000. Meanwhile, Ella has been working continuously for 10 years as a software developer with a growing tech company. After raises most years, she now earns $90,000.

Ella is the higher earner. After paying off debt and expenses, she contributes $12,000 to a Spousal RRSP for her husband, Zakk.

Ella deducts the RRSP contribution from her income and that $12,000 contribution reduces her personal annual RRSP contribution limit. That would help her get a tax refund, or at least lower the taxes that she pays that year.

In this case, because Zakk is the lower-income spouse, he is the person authorized to withdraw the funds from the RRSP. However, there is a little bit of a complication…

If you want to take out that money to use it, here comes the tax man! How do you deal with that?

How withdrawals from Spousal RRSPs get taxed

Zakk wants to make a withdrawal from the Spousal RRSP. Let’s say that his withdrawal is equal to or less than contributions Ella made in the year of withdrawal or two preceding calendar years.

In that case, the CRA will tax the withdrawal amount back to the contributor, Ella. But Zakk won’t get taxed, even though (as the lower-income spouse) he is the official holder of the Spousal RRSP (probably the lower-income spouse).

Let’s take a different case: Zakk wants to make a withdrawal from the Spousal RRSP, but Ella hasn’t made a contribution that year or in the preceding two years. In that case, he’ll be taxed on that income.

There are exceptions where the spousal attribution rule wouldn’t apply, such as if Ella died the year the funds were being withdrawn. It also wouldn’t apply if Zakk and Ella became non-residents. There are a few other technical exceptions, so if you're using this strategy, best to chat with your advisor.

Now, Spousal RRSPs aren’t the be-all, end-all of income splitting strategies. There is also…

Pension Income Splitting

You can transfer up to 50 percent of eligible pension income to your spouse. However, there’s a catch.

Eligible pension income is different when you’re under 65 than when you’re over 65. Here’s how:

Before 65, pension income splitting is limited to:

• Lifetime annuity payments from a registered pension plan (eg. monthly payments from a private pension)

• Certain death benefits

65 and over, pension income splitting includes:

The same stuff as above, plus payments from:

• RRIF

• Deferred Profit Sharing Program (DPSP)

For most Canadians, this up-to 50 percent splitting is usually enough to split couples’ retirement incomes to maximum efficiency. But maybe one spouse’s income is so high that there is still a gap? Well, there are other strategies…

Splitting your CPP

Splitting your CPP is not terribly common (we’ll explain why, below) but here’s an example of how it could work.

Let’s go back to the case of Zakk and Ella (many years later). When Ella took time off to raise their children (and even after she went back to work part-time), Zakk became the higher income earner. Now that he is retired, he is entitled to about $12,000 a year from CPP. Ella didn’t contribute as much and now is expecting only $6,000 a year from CPP. By sharing CPP credits, Zakk and Ella could lower their total tax bill.

We’re including this just to be comprehensive… but just to be clear, while it might work for Zakk and Ella, for many Canadians, this might not be worth the trouble. Your maximum CPP payment might only be around $1,100 a month, each. The tax savings on that income could be meagre. But hey, if you’re on a limited income in retirement, every dollar counts.

Tax-Free Savings Account (TFSA)

While this is not specifically an account that couples could use directly for income splitting, the TFSA can be part of anyone’s comprehensive retirement income strategy. And certainly, in cases where there is a big disparity of incomes, it may be better to draw income from this in retirement, instead of paying tax on drawn income from other types of accounts.

You can gift money to your spouse or common-law partner, who would then put it into their TFSA account. (You can’t ordinarily directly contribute the money into their account – but if it’s coming from a joint bank account, it won’t matter).

There are no tax consequences to withdrawing that money… so, make sure it’s at least considered for your overall long-term strategy.