What is the difference between an RSP and RRSP in Canada, exactly? And which one is better?
Keep reading to find common questions about retirement planning, including the difference between RSPs and RRSPs. Then, gain insights that can help you make more informed decisions about your own retirement.
In Canada, what’s the difference between an RSP and RRSP?
Let’s start with two distinct definitions to help answer this question:
- An RSP is a Retirement Savings Plan. It’s a retirement account intended to help individuals and couples save money and improve financial security after leaving the workforce.
- An RRSP is a Registered Retirement Savings Plan. It offers tax advantages as compared to holding assets and investing through other means. It’s designed to be a retirement savings vehicle, helping Canadians fund their golden years.
We want to make something totally clear: RSPs and RRSPs are the same thing. There is just one type of RSP — and RRSP, for that matter. The two terms are similar ways of referring to one type of specific account used to save for retirement.
The Government of Canada offers plenty of foundational information about RRSPs. One key feature to keep in mind is the tax-deferred nature of these plans.
Qualified contributions to an RRSP usually aren’t taxed when they remain in the account. You only need to pay taxes when taking money out of the plan, such as when receiving payments after retirement.
While they are not entirely tax free, RRSPs also offer a useful tax deduction. Compliant contributions made to an RRSP aren’t included when calculating income tax. That effectively means a lower tax rate when making RRSP contributions and building retirement income.
Is an RSP the same as an RRSP for tax purposes?
Yes, RSP is simply another name for an RRSP (the official initialism used by the government, financial institutions, and other authorities). When it comes to taxes, you will follow the rules set for RRSPs.
What are the advantages and disadvantages of an RSP?
Benefits of an RSP include:
- Tax advantages, both lowering personal effective tax rate and deferring taxes on contributions
- Ability to easily borrow against the balance for specific needs, like education or a first home
- Spousal contributions allowed and encouraged
- Reduced tax burden in retirement
- Remaining yearly contribution limit can be carried forward if not met
Potential drawbacks of an RSP include:
- High taxes on withdrawals
- Maximum contributions are based on income level
- Pension plans, like registered pension plans, can also reduce contribution levels
- RRSPs must be closed out and converted to RRIF (Registered retirement income funds) by age 71
RRSPs are generally a good vehicle for retirement savings. However, certain circumstances may make them more or less attractive on the individual level. Speaking with a staff member at your financial institution can help you decide if and when to use an RRSP.
Can you withdraw from an RSP?
Whether you call it an RSP or RRSP, it’s likely that you can withdraw money from yours. Unless you have a locked-in retirement account, there’s no direct barrier to making a withdrawal.
You will want to think about the importance of saving enough money for retirement, of course. And the fact that you’ll have to pay taxes on a withdrawal. But if you genuinely need funds for an emergency, your RRSP is certainly an option to consider.
Is it better to withdraw from an RRSP or TFSA?
A Tax-Free Savings Account (TFSA) is similar to an RRSP in the general sense that both offer tax advantages to their owners. However, the specific benefits are different.
RRSPs only require you to pay tax when taking money out of the account. TFSAs, meanwhile, are generally tax free across the board. The Canada Revenue Agency explains: “Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.”
That difference can make your TFSA more attractive when it comes to withdrawals. You can avoid the paying tax, as you would have to with an RRSP, when taking out funds.
Start Investing in Your Retirement
An RRSP is a great way to secure your financial future as a retiree, as well as fund specific needs like buying a first home or advancing your education. We’re here to help you open your RRSP simply and securely.