If you're considering a retirement savings plan, you are probably a bit confused about two very similar terms — the RSP and the RRSP. So, when it comes to RSP vs RRSP, which one is better, and what do these terms mean?
Keep reading to find answers to common questions about retirement planning, including the difference between RSPs and RRSPs. You’ll gain insights that can help you make more informed decisions about your retirement.
What Is an RSP?
RSP stands for “Retirement Savings Plan”. It’s a retirement account intended to help individuals and couples save money and improve financial security after leaving the workforce. It's a common term for all retirement options, including registered retirement savings plans.
A retirement savings plan is a broad term, so it may have many interpretations. From registered plans like the RRSP to unregistered retirement savings accounts or pension accounts, it typically covers them all.
What Is an RRSP?
An RRSP is a Registered Retirement Savings Plan, and it's a bit more precise of a term than the RSP. Although RSP and RRSP can be used interchangeably in most cases, there’s a key distinction to consider: a registered retirement savings plan is approved by the Canada Revenue Agency (CRA). 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 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.
An RRSP also offers a useful tax deduction. Contributions made to an RRSP aren't included when calculating income tax. That effectively means you can enjoy a lower tax rate while making RRSP contributions and building your retirement savings.
What's the Difference Between an RSP and RRSP in Canada?
As you can see the main difference between other retirement savings plans and the RRSP is in the tax benefits. To achieve tax deductions, you’ll need to pay attention to the contribution limit which is the maximum amount you can deposit into your RRSP every year. The current limit is up to 18% of your yearly income each year.
You might see, however, that the contribution limit for 2024 is $31,560. What happened to the 18% of your annual income? The maximum amount you can deposit this year is whichever is the lesser: 18% of your annual income or $31,560, so it’s important to know both limits every year as they are updated annually.
Is an RSP the Same as an RRSP for Tax Purposes?
Even though you may want to use the terms RSP and RRSP interchangeably, it’s important to remember there are retirement plans without tax exemptions by the CRA. When dealing with the CRA or filing your taxes, it's best to use the official term “RRSP” to avoid miscommunication.
Types of Retirement Savings Accounts in Canada
An RRSP isn’t the only savings plan you can use for a retirement fund in Canada. There are several different plans you could opt for, so here's a brief overview of each to make things more clear.
Tax-Free Savings Accounts
One plan type that is often compared with a registered retirement savings plan is the tax-free savings account (TFSA). Like the RRSP, it also comes with some tax exemptions. With a TFSA, you pay income tax before putting money into it, then your money grows tax-free.
A tax-free savings account is more flexible than the RRSP since you can withdraw the funds without paying any tax. A registered retirement savings plan requires you to pay tax on withdrawals.
A TFSA and RRSP can be used for different purposes; you can get both of them if needed. For example, you can use the TFSA if you’ve already maxed out your RRSP contributions. And the RRSP can serve for retirement savings, home purchase financing, or education.
If you’re unsure about which one to get, contact our specialists. We’ll be happy to help you make the right decision.
Registered Pension Plans
A registered pension plan (RPP) is pretty similar to an RRSP with a few key differences. The biggest one is that it’s usually set by your employer, who then handles the contributions. Of course, you can also choose to contribute depending on the plan, and the contributed funds are tax-deductible.
Unlike a TFSA, it's used only as a retirement savings program. Even if you leave your current job, it's possible to keep all contributions, depending on regulations in your province.
Non-Registered Accounts
Non-registered accounts are another option for you, but they are taxable. This means you'll be paying that income investment tax that you would otherwise be exempt from if you used a registered plan.
However, there are no contribution limits in place. You’ll still earn a comparable interest rate to that of registered investments, and with our Member Rewards, you’ll even earn cash dividends on non-registered savings.
Plus, in many cases, there are no minimum age requirements for non-registered savings accounts or plans, so you can start saving at any age. They can also be used in combination with a registered account if you've already maxed out on your contribution limits.
What Are the Advantages and Disadvantages of an RRSP?
Benefits of an RRSP include:
Tax advantages, both lowering the personal effective tax rate and deferring taxes on retirement savings contributions
Ability to easily borrow against the balance for specific needs, like education or a first home purchase
Spousal contributions are allowed and encouraged
Reduced tax burden in retirement
The remaining yearly contribution limit can be carried forward
Potential drawbacks of an RRSP include:
High taxes on withdrawals before retirement
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 registered retirement income funds (RRIF) by age 71
RRSPs are generally a good vehicle for retirement savings. However, certain circumstances may make them more or less attractive to an individual. Speaking with a consumer advisor 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. However, paying taxes on withdrawals works against your retirement savings.
So, if you want to have the extra option of making a withdrawal without having to pay taxes on it, you can consider a different type of account. Our specialists are ready to help you choose the best option for your needs!
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 require you to pay tax when taking money out of the account, but your contributions are tax-deductible. With TFSAs, you can withdraw funds tax-free, but your initial contributions come from your taxed income.
With a TFSA, 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. However, RRSPs provide significant benefits for long-term retirement planning. You can reduce your taxable income now and allow your savings to grow tax-deferred until retirement.
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.
The Bottom Line
We hope this helps you better understand RSP vs RRSP and the different options available to you. When choosing a retirement savings plan, make sure to consider the contribution room, tax-free withdrawals, limits, and general tax benefits.
If you’re still struggling to make the final call, feel free to reach out to us via email or schedule a call with our friendly support staff. We’re here to help you find the perfect retirement savings option!