RRSP vs RSP: What's the Difference?
In Canada, you might hear the terms Retirement Savings Plan (RSP) and Registered Retirement Savings Plan (RRSP) very often, and sometimes they are used interchangeably. However, they have distinct meanings and implications.
Understanding the differences between RSPs and RRSPs will help you create a successful retirement savings strategy and reach your life goals.
What is a Registered Retirement Savings Plan (RRSP)?
An RRSP is a specific type of registered savings plan designed for retirement savings. It can be both registered and non-registered plans. Here are different types of registered plans for retirement:
Registered Retirement Savings Plans (RRSPs): These accounts are designed to help Canadians save for retirement with significant tax benefits. Contributions to an RRSP are tax deductible, and taxation of the growth of investments is deferred until withdrawal. The annual contribution limit is the lesser of 18% of your previous year’s income or the maximum amount set by the government.
Pooled Registered Pension Plans (PRPPs): PRPPs are a collective retirement savings option for employed and self-employed Canadians in select provinces and territories. Participants from different employers contribute to a shared investment fund. Contributions are tax deductible, and the contribution limits are the same as for an RRSP.
Registered Pension Plans (RPPs): These are employer-sponsored retirement savings plans offering two main types: Defined Benefit Plans: These plans guarantee a specific pension amount upon retirement. The contributions required can vary, and there is no annual contribution limit. Defined Contribution Plans: Unlike Defined Benefit Plans, these do not guarantee a specific pension amount. Instead, you decide how much to contribute, and there are annual contribution limits similar to those for RRSPs.
Registered Retirement Income Funds (RRIFs): RRIFs are investment accounts that convert RRSP savings into retirement income. Upon turning 71, you must transfer your RRSP funds into an RRIF. You must follow minimum annual withdrawal rules, and withdrawals are taxed as income.
Non-registered accounts offer a flexible and versatile way to save and invest for retirement. Unlike registered plans, there are no contribution limits, and you can invest in a broader range of assets. However, the income earned from these accounts is generally taxable. While you cannot claim a tax deduction for contributions, you can freely withdraw funds without additional taxes, and capital losses can be used to offset capital gains.
What is a registered savings plan (RSP)?
RSPs refer to a variety of tax-advantaged savings plans registered with the Canadian government. These plans have specific rules for contributions and withdrawals. Some common RSP types include:
Tax-Free Savings Accounts (TFSAs): These accounts allow for tax-free growth on contributions. Contributions are limited to a yearly maximum, and neither gains from investments nor withdrawals are taxed.
Registered Education Savings Plans (RESPs): RESPs help families save for a child’s post-secondary education. Contributions grow tax-free, and there are benefits like the Canada Education Savings Grant (CESG) for education-related withdrawals.
Registered Disability Savings Plans (RDSPs): RDSPs offer a savings solution for individuals with disabilities (eligible for the Disability Tax Credit) and their families. They provide tax benefits and include government grants and bonds to help grow savings for long-term needs.
RRSP vs RSP:
The key difference between an RRSP and an RSP is that an RRSP is a specific type of registered account designed primarily for retirement savings, offering tax-deductible contributions and tax-deferred growth until withdrawals are made, which are then taxed as income.
In contrast, an RSP is a broader term that encompasses various types of registered accounts, each with different purposes and tax benefits. While an RRSP focuses on retirement savings, other RSP types include TFSAs for tax-free growth and withdrawals, RESPs for educational expenses with government grants, and RDSPs for long-term financial planning for individuals with disabilities.
Knowing these distinctions between RRSP and RSP helps you implement the right savings strategy to meet your objectives, be it retirement, education, or long-term planning.