RSP vs. RRSP: Comparing Retirement Savings Plans

WOWA Simply Know Your Options

A Registered Savings Plan is essentially a savings plan which is registered with the CRA (Canada Revenue Agency) for it to qualify for the tax benefits it offers. It may or may not be a retirement savings plan. The main types of Registered Savings Plans available in Canada are:

Retirement Savings Plan is a term used to define any savings plan that is meant to provide you with an income in your retirement. There are several plans that can come under the umbrella of RSP.

The most common of them are RRSP and TFSA which are discussed above. An RRSP can be converted to a Registered Retirement Income Fund (RRIF) to provide you a regular income when you retire. Apart from these, your employer may also provide the option of a Registered Pension Plan (RPP). Another option that is available only to employees whose employment falls under federal jurisdiction, and to Canadians employed or self-employed in Yukon, Northwest Territories and Nunavut is the Pooled Registered Pension Plan (PRPP).

Registered Retirement Income Fund (RRIF): RRIF is opposite of what RRSP is. Before retirement, you deposit money into the RRSP every year, and after retirement, you can withdraw money from your RRIF every year. You cannot make any contributions to the fund once it is established and only withdrawals can be made.

RRIF has a minimum annual withdrawal amount which is set every year based on your age and the amount available in the fund. However, there is no maximum withdrawal limit. As in RRSP, you choose what type of investments are held in the RRIF and do not pay any taxes on the amount in the plan and its earnings as long as the amount is held in the plan. You do however have to pay taxes on the amount you withdraw from the plan.

Registered Pension Plan (RPP): A Registered Pension Plan is an arrangement where an employer makes full or partial contributions to a pension plan on your behalf, which is meant to support you in your retirement.

Both you and your employer can seek income tax deduction for your contribution to the RPP. It is also noteworthy that contributions to the RPP are counted against your RRSP contribution room through Pension Adjustment (PA). If your employer is contributing towards an RPP on your behalf, you could seek information from them regarding making withdrawals, early retirement and other pertinent topics.

Pooled Registered Pension Plan (PRPP): A Pooled Registered Pension Plan is a new kind of savings plan that is meant for those who don’t already have a workplace savings plan. This is available only to employees whose employment falls under the federal jurisdiction, or to those who are employed or self-employed in the Northern Territories – Yukon, Northwest Territories and Nunavut.

The advantage of a PRPP is that the individual assets are pooled and thus the administration costs are lower. The plan is administered by a licensed corporation resident in Canada and the contributions made to the plan are counted against your RRSP contribution room.

RRSP is the most commonly known savings vehicle to save for retirement. RRSP contributions are tax deductible, which means you don’t have to pay taxes on the amount you contribute towards your RRSP. Every year, you can contribute up to 18% of your income (up to a limit) to an RRSP without having to pay taxes on it in that year. However, the tax is not exempt but is deferred, which means you have to pay taxes when you withdraw from your RRSP.

Benefits of RRSP:

• No minimum age requirement: An RRSP can be opened at any age as there is no minimum age requirement. Minors may be able to set up an RRSP with a parent or guardian. Some financial institutions however require the account holder to have reached the age of majority. You can make contributions till the end of the year in which you turn 71.
• Tax-Deductible: The CRA sets a tax-deductible limit for RRSP each year. You can contribute up to 18% of your pre-tax income in the previous calendar year, or up to the limit set by CRA, whichever is less. Please note that any contributions that exceed the limit by more than $2,000 are taxable at 1% per month. The contribution is tax deferred, which means you pay taxes when you withdraw from your RRSP.
• Unused contribution room is carried forward: The unused contribution room from one year is carried forward to the next year, which means if you did not exhaust your contribution room last year, you can contribute extra and make up for it this year.
• Tax deferred earnings: One big advantage of the RRSP is that the earnings of the account are not taxed while they are still in the account, which helps your money in the account grow faster than that in taxable accounts. You pay regular income tax when you withdraw from the account.
• Withdrawal with HBP and LLP: You can withdraw the RRSP contribution without paying tax to buy your first home with the Home Buyers Plan (HBP); or to return to school with the Lifelong Learning Plan (LPP). These withdrawals have a limit and are required to be repaid over a period of 15 years.
• Protected from Creditors: Unlike TFSA and RESPs, RRSPs cannot be seized to cover any personal liabilities that can be a result of claims from lawsuits or bankruptcies and therefore remain protected.
• Withdrawal before retirement age: RRSP can be withdrawn at any age and you do not need to be of retirement age to be able to withdraw your RRSP. This is especially beneficial for early retirees. However, the withdrawals are subject to a withholding tax that is held by your financial institution; and if the withheld tax is not enough to account for the income tax owed as per your tax bracket, you may need to pay more income tax.
• Lifetime tax rate benefit: When you make contributions during your high tax rate years (when you are earning more), you can reduce the taxable income during this year and pay fewer taxes. On the other hand, when you withdraw during your lower tax rate years (when your income is lower), you are automatically paying lower taxes on your withdrawals.

Drawbacks of RRSP:

• It is taxed as a regular income: When you start withdrawing from your RRSP, the withdrawals are treated as regular income and are taxed accordingly.
• Compulsory withdrawals when you turn 72: When you turn 72, you are required to make at least the minimum prescribed withdrawals irrespective of whether you need them or not. What’s more is that you need to pay taxes for those withdrawals.
• Your contribution room depends on your income: Unlike TFSA, your RRSP contribution room depends on your income. In your lower income years, you cannot contribute more than 18% of your income even if you are capable of doing so.
• You cannot re-contribute your withdrawals: Unlike TFSA, any withdrawals from your RRSP account cannot be contributed back.

Types of RRSP Investment Options

RRSP investments can be in different forms, which can be low or high risk. The following are common types of RRSPs:

If you exhaust your limit for contribution to the TFSA and RRSP, you could still save more for your retirement through non-registered investment accounts. In any case, the amount you save through your TFSA and RRSP may not be sufficient for your post retirement expenses, and it is always better to save and invest more while you are earning.

You can open investment accounts through brokerages and start trading in bank stocks, dividend stocks, Exchange Traded Funds (ETFs) and more. Non-Registered accounts do not give you any tax shelter like the registered accounts do. You do not get any tax deductions for your contributions to such accounts and may also have to pay taxes on the earnings of the account. However, they are also free from limitations that come with registered accounts.

Is RRSP Taxable?

RRSP is tax-deductible, which means that your contribution is deducted from your taxable income for the tax year. However, the tax is deferred and not exempted, which means you have to pay taxes when you make withdrawals.

Which is better, RSP or RRSP?

RRSP is a type of both Registered Savings Plan (RSP) and Retirement Savings Plan (RSP), which are both a category of accounts. There are different types of Registered Savings Plans and Retirement Savings Plans available to Canadians. The advantage of RRSP is that it is tax deferred, which means you don’t pay taxes on your contributions, you pay taxes when you withdraw the contributions.

What are the rules for withdrawing from RRSP?

You can withdraw from your RRSP before retiring, however, these withdrawals are subject to withholding tax, that your financial institution withholds; and if the amount withheld is not enough to account for the tax you owe as per your tax bracket, you may also have to pay additional income tax for your withdrawal. The RRSP matures on the last day of the calendar year in which you turn 71 and you need to make compulsory withdrawals after that. RRSP can be withdrawn in three ways on maturity:

• Lump Sum Withdrawal
• Convert to RRIF
• Purchase an annuity

You can withdraw from your RRSP before maturity and without having to pay tax only if you need it to pay for your first home under the Home Buyers Plan (HBP) or if you need it to continue your education under the Lifelong Learning Plan (LLP). These withdrawals however need to be repaid over a period of 15 years.