Regarding retirement savings, terms like RSP, RRSP, and the likes often come up. There’s a popular misconception that RSP and RRSP are the same.
However, although they are related, they refer to two different things. This brings us to the question, what is RSP vs RRSP? You are about to find out!
In this article, we’ll cover the difference between RSP vs RRSP in detail. We’ll also show you how you can use both of them to create the most effective retirement plan. What of TFSA, RPP, and RRIF? We will also consider them each.
However, let us start with RSP vs RRSP, then we can compare them to every other option.
The Basics of RSP vs RRSP
What is the difference between RSP vs RRSP? As you may know, an RSP is an acronym that stands for “Retirement Savings Plan.” RSP is a general term that refers to several financial products put in place to help you while saving for retirement.
On the other hand, an RRSP (Registered Retirement Savings Plan) is a specified kind of account that comes with two unique attributes.
The first unique attribute is it comes with tax advantages. What does this mean? It merely means any contributions can be removed from your income. The second attribute is the amount of money you can withdraw each year is limited.
Many people use the terms RSP and RRSP interchangeably when conversing, but this is not entirely accurate. As we explained earlier, an RSP is a general term for different types of Retirement Savings Plans, and an RRSP is only an example of one of them.
Therefore, while all RRSPs are an RSP, not all RSPs are RRSPs. Make sense? Apart from RRSP, there are many other retirement account options under the RSP umbrella.
They include Tax-Free Savings Accounts (TFSAs), Registered Pensions Plans (RPPs), and Non-Registered Accounts. Let’s go over each of them in detail, so you can see how they can help you to reach your retirement goals and know which one is right for you.
RSP vs RRSP:
What are the RSP Options?
There are several retirement savings plan options available to Canadians today, and they come with very nice tax benefits. Let’s dig in!
Registered Retirement Savings Plan (RRSP)
The most popular RSP is the Registered Retirement Savings Plan (RRSP), and they’ve been around since the 1950s. An RRSP is a retirement savings product that comes with many tax benefits. Many times, when a financial institution mentions RSP, they mean an RRSP.
People have used them interchangeably, which is precisely why we discussed the difference between RSP vs RRSP above. Only a financial institution that the CRA (Canada Revenue Agency) approves of can sell an RRSP.
You can verify their approval by asking them for their Specimen Plan number. You can invest the funds in your RRSP in several ways, such as GICs, stocks, mutual fund, and ETFs.
If you are married, you can further benefit from RRSP tax savings by contributing to an RRSP in your spouse’s name.
RRSPs Tax Benefits
RRSP offer two tax benefits:
- Your RRSP contributions can be removed from your annual taxable income. This means your contributions are tax deductible. Therefore, you can reduce the amount of income tax you are required to pay for every year you contribute.
The financial institution you set up your RRSP with will give you a contribution receipt per year and you have to claim the contribution on your income tax.
- Any investment or savings earnings in an RRSP are tax-sheltered until you withdraw the funds. This means, as long as the funds are still in your account, you won’t pay taxes on them.
Note: you can’t use losses on RRSP investments to offset investment gains.
RRSPs Contribution Limits
There are limits to your yearly RRSP contributions. However, if you don’t use them up, they carry over to the following year and add to the new year’s contribution limit. These limits are based on two possible figures, and the lesser one is the one you’ll apply.
- The first value is 18% of your total pre-tax earnings from the past year, or
- The limit set by CRA ($27,230 as of 2020).
Therefore, unless your income is above $151,277, your RRSP contribution limit is 18% of what you make. You can easily find these limits in your previous year’s tax return. For people who have pension plans set by employers, these limits will get reduced to level the grounds.
However, be careful so you don’t overcontribute, as any contribution you make above this limit will attract a 1% fee per month until you withdraw them.
The withdrawal is the tricky part. Since your RRSP is intended to help you save up for retirement, if you decide to withdraw the funds early, you’ll be penalized with withholding taxes.
This is the reason some people aren’t eager to contribute early in life because retirement appears far away compared to potential financial challenges. However, this rule has two exceptions:
- Home Buyers Plan (HBP) – It allows you to borrow a specific amount from your RRSP tax-free to purchase your first home.
- Lifelong Learning Plan (LLP) – It lets you borrow a particular amount from your RRSP tax-free to help you pay for continued education.
As soon as you hit retirement, your withdrawals have to be declared as part of your income, and they’ll be subject to income tax. You should note that you have to convert your RRSP to an RRIF (Registered Retirement Income Fund) once you turn 71.
You’ll then be forced to make withdrawals. All RRSP/RRIF withdrawals are subject to income tax.
Tax-Free Savings Account (TFSA)
Another popular savings option is TFSA. It was introduced to Canadians in 2009 and has been around since then. Unlike with RRSPs (except for HBP and LLP), with TFSA, you are not limited to saving for retirement alone unless that’s what you want.
TFSA also has some tax benefits and contribution limits. Let’s go over them.
TFSA Tax Benefits and Withdrawals
Contributions you make to your TFSA are not tax-deductible. This means they won’t reduce the amount of tax you pay. In essence, this saving option is called TFSA because any money you make within the account is not taxed.
All investment earnings in a TFSA are tax-sheltered so, you don’t have to declare them on your income tax. Your withdrawals are also non-taxable, unlike the RRSP. You don’t have to report them as part of your income or on your T1 General Income Tax Return form.
TFSA Contribution Limits
The CRA sets a yearly contribution limit for TFSA ($6,000 for 2020), and you can carry over unused contribution room to the next year. Any time you withdraw, it will be added back to your limit for the following year.
Just like the RRSP, you will be charged a fee if you overcontribute. Therefore, it’s best if you know your limit and stay within it. You won’t get a formal receipt at the end of the year like you receive for the RRSP.
So, the onus is on you to keep track of your contributions. The good thing is that many investment providers will help you track your contributions after opening a TFSA making it easier for you to stay within the limit.
Registered Pension Plans (RPP)
Many employers put in place pension plans for their workers. If your workplace makes retirement contributions for you, it’s likely in an RPP.
A Registered Pension Plan (RPP) is a retirement savings plan set up by your workplace on your behalf. It is also often called a corporate pension or an employer-sponsored.
There are 2 main types of Registered Pension Plans:
- Defined Benefit (DB)
The first RPP type is a defined benefit. It is a promise from your employer to pay you a set monthly wage during retirement. A number of factors like your age, income level, and years of service determine the amount you’ll get paid.
Some DB plans may split the contributions between the employer and the employee, while the employer covers the full cost of the pension for other plans.
- Defined Contribution (DC)
A defined contribution RPP is more common and similar to an RRSP. Your employer and likely you make the contributions, and you can choose how to invest your contributions.
Then your pension income in retirement will depend on how much you saved up and how much those investments performed. Usually, this RPP type also has a matching program where your employer matches any contribution you make.
RPP Withdrawals and Contributions
Any contributions you make to an RPP will impact your RRSP contribution limits and reduce them. This reduction is called “pension adjustments.” The pension adjustment gets added to your RRSP contribution room calculation automatically on your yearly tax assessment statement.
Vital aspects of your RPP, such as what happens if you leave your employer prior to retirement, the normal retirement age, or when you can begin seeing the withdrawals depend on your employer or province. Your contact at work can give you the most accurate information.
Generally, suppose you leave your employer before retirement. In that case, you can either decide to get a reduced value of the pension that you can reinvest in another employer’s RPP or a LIRA (Locked-In Retirement Account). The other option is to remain an RPP member and receive your pension at retirement.
Like savings accounts, non-registered accounts don’t offer any tax benefits or tax-sheltering. Also, there are no investment earnings, and the losses are fully taxable.
However, they are perfect for when you’ve maxed out your accounts that have tax advantages (RRSP and TFSA).
The reason is they have no age limits (you can hold your account for as long as you wish), no contribution limits or rules, and you can withdraw at any time.
You have the chance to hold a broader range of investments in a non-registered account because they are not limited by the strict investment rules that govern registered accounts, as seen below:
|Investments Registered Plans Can Hold||Investments Registered Plans Cannot Hold|
|Exchange-traded funds, mutual funds, segregated funds||Syndicate mortgages, private mortgages, angel investor arrangements.|
|Cash||Non-arm length transactions like a debt to the account holder or shares in a company that the account holder has more than a 10% interest.|
|Government bonds||Investments that trade on over-the-counter markets|
|Corporate bonds||Other 3rd tier investment arrangements types|
|Securities listed on a designated stock exchange (derivatives may be excluded)|
RSP vs RRSP:
Can You Claim RSP on Your Income Tax?
The answer to this depends on the account you put your money, as we’ve explained throughout this article. For an RRSP, when you contribute, you get a tax deduction that reduces your net income by the amount you contributed.
However, not every RSP contributions allow you to claim a tax break. For instance, when it comes to TFSA contributions, the contributors don’t get tax benefits immediately. This is because contributions to TFSA are made with after-tax dollars.
However, the pros come during withdrawals. Any earnings in your TFSA is tax-free, including during withdrawal.
Another example is investments made in non-registered accounts. They also do not carry tax benefits, so most contributors max-out their RRSP and TFSA contribution rooms before opening a non-registered account for investments.
Overall, you can claim income tax on your RRSP, TFSA, and RPP. However, you can’t claim on your non-registered account.
RSP vs RRSP:
How to Choose Which RSP is Best for You
If you can choose all, then the more, the merrier. This is because of the contribution limits placed on most of the accounts, and the more money you save up for retirement, the better. So, if it’s within your finances, maxing out your limits is a great choice.
Overall, there is no one best retirement plan. They were all designed to complement one another. Since you can’t get everything you need on just one plan, the best move would be to spread out your savings.
You can start with your RRSP to take advantage of the tax deductions and then proceed to your TFSA. After you’ve maxed out the TFSA, you can go for non-registered options. If you are offered free money from RPPs, don’t turn it down.
Frequently Asked Questions on RSP vs RRSP
How does an RSP work?
Every amount you contribute to your RSP till you reach your contribution limit is deducted from your past year’s taxable income. Earnings grown inside an RSP are tax-free until you withdraw them.
As long as your investments are in your RSP, they can continue to increase and accumulate tax-free.
Are RRSP really worth it?
RRSP are hard to beat among all the retirement savings options. Your contributions are tax-deductible so you can remove them from your income tax which means they can reduce them.
However, they are not really the best option if you are saving short-term. Withdrawals on RRSP increase your annual income and may lead to you paying more taxes.
Can you claim RSP on income tax?
Your RSP contributions are tax-deductible, and they may lead to a tax refund. Your earnings on RSP investments compound inside the plan tax-deferred. Returns you earn on RSP investments accumulate tax-deferred inside the plan.
You are allowed to contribute to your RSP account anytime throughout the entire year and up to 60 days after the year ends.
Which is better RRSP or RSP?
This brings us to the question- what is the difference between RSP vs RRSP? An RSP is an umbrella term that refers to several retirement accounts, while an RRSP refers to only one particular type of account.
Some of the benefits of RRSP are: First, it has tax benefits i.e., you can remove any contributions you make from your income. The second one is there is a limit to the amount of money you can invest each year.
Can I withdraw money from RSP?
As long as your funds are not locked, you can withdraw your money at any time. However, your withdrawals are liable to withholding tax, and you have to include your withdrawal as income when you are filing your taxes.
Sometimes, you can make tax-deferred withdrawals from your RRSP. You can make a withdrawal from your RRSP any time1 as long as your funds are not in a locked-in plan.
However, the withdrawal is subject to withholding tax and the amount also needs to be included as income when filing your taxes. There are situations in which tax-deferred withdrawals can be made from your RRSP.
Final Thoughts- RSP vs RRSP
Now you are aware of the difference between RSP vs RRSP, and that you shouldn’t use both terms interchangeably. Apart from RRSPs, other accounts like TFSA, RPP, and non-registered accounts also fall under the RSP umbrella.
You can decide which ones you want in your retirement savings strategy. The best thing is to take advantage of all the options by spreading out your savings.
Even if your budget is very limited, you can contribute as low as $25 per month to each of the accounts. Sure, you want to relax knowing your golden years are covered. With the right guidance, you can achieve this.