RSP vs RRSP: Understanding the Difference

Let’s understand the difference between RSP and RRSP: RSP vs RRSP. RSP (Retirement Savings Plan) and RRSP (Registered Retirement Savings Plan) are terms that often get mixed up. While they are similar, there are some key differences that you should know to make the most out of your retirement planning. Let’s break it down.

RSP vs RRSP: Understanding the Basics

What is an RSP (Retirement Savings Plan)?

An RSP, or Retirement Savings Plan, is essentially an account that helps Canadians save money for retirement. The main difference between an RSP and an RRSP is registration. An RSP becomes an RRSP once it’s registered with the Canada Revenue Agency (CRA). Until then, it’s just called an RSP.

What is a Registered Retirement Savings Plan (RRSP)?

An RRSP, or Registered Retirement Savings Plan, is a special account registered with the CRA. Contributions to an RRSP can be deducted from your taxable income, which can help reduce the amount of tax you owe. For 2024, you can contribute up to 18% of your previous year’s “earned income,” with a cap of $31,560. The best part? Any income earned within the RRSP isn’t taxed as long as it stays in the account. You only pay tax when you withdraw the money.

Key Features of an RRSP

Carry Forward Unused Contribution Room: If you don’t use up your contribution limit in one year, you can carry it forward to future years.
Home Buyer’s Plan (HBP): This allows you to withdraw up to $35,000 from your RRSP to buy or build your first home ($70,000 for couples).
Flexible Investment Options: RRSPs can hold various investments like mutual funds, ETFs, GICs, and even individual stocks.

Other Types of Retirement Savings Accounts

Retirement planning isn’t just about RRSPs. There are other accounts to consider, each with unique benefits and tax implications.

Tax-Free Savings Account (TFSA)

A TFSA is another account registered with the CRA. Contributions are made with after-tax dollars, so you don’t get a tax break upfront. However, any income earned in a TFSA is tax-free, and withdrawals are also tax-free.

Registered Pension Plan (RPP)

RPPs are typically offered by employers and come in two types: Defined Benefit (DB) and Defined Contribution (DC). DB plans promise a specific payout at retirement based on factors like salary and years of service. DC plans depend on the contributions made and the performance of the investments.

Non-Registered Accounts

Non-registered accounts are more flexible and have no contribution limits. However, investment income is taxed when earned. Capital gains are taxed at 50% of your marginal tax rate, but you can use capital losses to offset capital gains.

Key Difference Between an RSP and an RRSP: RSP vs RRSP

Simply put, an RSP becomes an RRSP once it’s registered with the CRA. An RRSP offers tax benefits that an unregistered RSP does not.

Frequently Asked Questions

What is a Registered Plan?

A registered plan refers to a variety of accounts registered with the CRA, including RRSPs, TFSAs, Registered Retirement Income Funds (RRIF), Registered Education Savings Plans (RESP), and Registered Disability Savings Plans (RDSP).

Can I Transfer Funds from a Non-Registered Account to an RRSP?

Yes, you can transfer funds or investments from a non-registered account to an RRSP. You’ll get a contribution receipt for the fair market value of the assets transferred.

Can I Withdraw Money from an RRSP?

You can withdraw funds from an RRSP at any time, but the amount withdrawn is subject to withholding tax and must be reported as income. Some RRSPs have restrictions, especially if they are locked-in. Check with your RRSP issuer if you’re unsure.

Final Thoughts

RSPs and RRSPs are both valuable tools for retirement planning. Understanding the differences and how they work can help you make the best choices for your financial future. Don’t forget to explore other retirement savings accounts as well to ensure a comfortable retirement.