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RSP vs RRSP: Decoding the difference
The terms RSP (Retirement Savings Plan) and RRSP (Registered Retirement Savings Plan) are often used interchangeably. However, there is a slight difference between the two. Learn about the key difference between RSPs and RRSPs and how they can help you in your retirement planning.
What is an RSP (Retirement Savings Plan)?
RSP stands for Retirement Savings Plan. It’s an account designed to help Canadians save money for their retirement. The key difference between an RSP and an RRSP is that the term RSP is used prior to it being registered with the Canada Revenue Agency (CRA). Once the RSP is registered with the CRA, it is called a Registered Retirement Savings Plan (RRSP).
What is a Registered Retirement Savings Plan?
An RRSP, or Registered Retirement Savings Plan, is a plan that’s registered with the CRA where deductible RRSP contributions can be used to reduce your tax. You are allowed to contribute up to 18% of a previous year’s "earned income" (as defined in the Income Tax Act), with a prescribed upper limit. For 2023, the maximum contribution amount is $30,780. Any income earned in the RRSP is generally exempt from tax as long as the funds remain in the plan. Tax is applicable when you receive payments from the plan. A few key features of an RRSP account are:
- The unused contribution room can be carried forward to a subsequent year.
- The Home Buyer’s Plan (HBP) lets you withdraw from your RRSPs to buy or build a home. You can withdraw a maximum of $35,000 per person or $70,000 for a couple provided you have these funds in your RRSPs. You can learn more about the HBP, here.
- You can hold a wide range of investments within your RRSP. These can include mutual funds, Exchange-Traded Funds (ETFs), Guaranteed Investment Certificates (GICs), and even individual securities.
You can explore the benefits of contributing to an RRSP, here.
Other types of retirement savings accounts
Besides an RRSP, there are many accounts that could be a part of your retirement savings planning, and all of them come with their own tax considerations.
Here’s a quick look at some of them.
Tax-Free Savings Account (TFSA)
TFSAs are accounts that are registered with the CRA and offer tax advantages. However, unlike RRSPs, TFSA contributions are made with after-tax income. While there are no up-front tax breaks, earnings within TFSAs grow tax-sheltered. You can learn more about Tax-Free Savings Accounts, here.
Registered Pension Plan (RPP)
Registered Pension Plans are generally offered by employers and are of two types – Defined Benefit (DB) and Defined Contribution (DC). DB plans promise to pay a set pension amount based on factors like age, years of service and earnings history. DC plans, on the other hand, provide pension benefits based solely on contributions and investment earnings. Contributions made by your employer to your RPP may also impact your RRSP contribution limit.
Non-Registered Accounts
Non-registered accounts can also be used to save up for retirement. These accounts allow you to invest in a wide variety of investments, so you are not necessarily restricted to qualified investments as with a Registered Plan. While non-registered accounts offer benefits like flexibility and no contribution limits, investment income is generally taxed when earned or realized. Though you can’t claim a tax deduction for contributing to a non-registered account, remember that capital gains are taxed at 50% of your marginal tax rate. Also, capital losses can be used to offset capital gains.
The key difference between an RSP and an RRSP
RSP is simply another name for an RRSP. An RRSP account is opened as an RSP and the financial institution, the account is opened with, requests the CRA to register the RSP. Once the account is registered with the CRA, it becomes an RRSP.
Frequently asked questions
What is a Registered Plan?
The term registered plan, or "registered savings plans" is often used to refer to not only RRSPs but also to a wide variety of accounts that are registered with the CRA. A few examples include the Registered Retirement Income Funds (RRIF), the Tax-Free Savings Account (TFSA), the Registered Education Savings Plan (RESP) and the Registered Disability Savings Plan (RDSP).
Can I transfer funds from a non-registered account to an RRSP?
Yes, you can make contributions in cash or "in-kind" from your non-registered account to your RRSP. You will receive a contribution receipt for the fair market value of the assets contributed.
Can I withdraw money from an RRSP?
As long as the funds remain in the plan, any income earned in an RRSP is generally, exempt from tax. You can withdraw funds from an RRSP at any time (subject to any restrictions on the investments held). These withdrawn funds may be subject to withholding tax and must be reported as income when filing your taxes. Please note, special rules and restrictions apply to locked-in RRSP withdrawals. If you are unsure whether your RRSP is locked-in or not, simply reach out to your RRSP issuer.
On a final note
Ultimately, both RSPs and RRSPs are technically the same thing and can help you plan your retirement effectively. You may also want to explore other retirement savings accounts as part of your overall financial strategy to ensure that your retirement years are truly comfortable.
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