RSP vs. RRSP: what’s the difference?

The Retirement Savings Plan (RSP) and Registered Retirement Savings Plan (RRSP) may appear and sound similar, and this often leads to some confusion. If you work in Canada and are making plans for retirement, knowing their differences and leveraging their benefits are of great importance.

In this article, we delve into the features of the RRSP, the types of RSPs, compare RSP vs RRSP and provide some clarity as to their differences.

What is the Retirement Savings Plan (RSP)?

The Retirement Savings Plan (RSP) is a general category that includes any account whose primary purpose is to provide the account holder with a source of income for retirement. Whenever you see RSP or “Retirement Savings Plan”, this can refer to any number of accounts or vehicles involved with retirement planning.  

What is the difference between RSP vs. RRSP?

For a clearer picture, here are their definitions:

RSP – Retirement Savings Plan. This is any retirement account that’s used by individuals or couples to build up a nest egg for their financial security once they’ve retired.

RRSP – Registered Retirement Savings Plan. This is a form of RSP with a notable difference. The RRSP has tax advantages that are better than having assets or other investments for retirement. This is a source of funds for many Canadians when they retire.

Both RSP and RRSP are used interchangeably, probably because the most common type of RSP is the Registered Retirement Savings Plan or RRSP. There are, however, other types of RSPs.

In many cases, whenever a financial institution refers to an RSP, they often mean the RRSP, and this is what can sometimes cause confusion.

What is the RRSP or Registered Retirement Savings Plan?

According to a report, RRSP is the preferred retirement account of choice for most Canadians. When opening an RRSP, you can only do so at financial institutions that are approved by the Canadian Revenue Agency (CRA). Thankfully, many banks offer this as a service, so getting an RRSP is not difficult. 

What makes the RRSP unique is that any contributions made to it are tax-deductible up to a specific amount limit every year. This is around 18% of the pre-tax earnings from the previous calendar year or the limit set by the CRA, whichever amount is lower.

While this is a great benefit, there is a catch: any unmet contributions are moved forward every year and carried to the next year’s contribution limit. This is done so if you can’t meet the contribution for this year, you are given a chance to catch up with your RRSP contribution later on.  

Benefits of RRSP

Apart from RRSP contributions being deductible from your income tax (up to a certain amount), these are some of the other benefits of an RRSP:

• The financial institution that holds your RRSP provides you with a contribution receipt, making it easier to calculate your tax deductions
• If you forget or fail to include your RRSP contributions as tax deductions, the CRA gives suggestions and instructions for what to do with the undeclared contributions
• Any interest or capital gains on the RRSP are tax-sheltered until the funds are withdrawn
• You do not have to declare any earnings on your RRSP in your income tax statement, maximizing compound interest; however, any losses cannot be used to offset the investment gains and place you in a lower tax bracket when the funds are withdrawn
• You can contribute to your RRSPs and let it grow until December 31 of the calendar year in which you or your spouse turn 71 (if you have a spousal RRSP)
• When the owners of the RRSPs reach the age of 71, they have the option to convert the RRSPs to a Registered Retirement Income Fund (RRIF) that pays out and is taxed minimally each year, instead of paying a large tax after withdrawing the entire RRSP

In the table below, you’ll see the withholding taxes on RRSPs. Tax rates apply on every withdrawal you make on the RRSP, so it may be wise to make RRSP withdrawals only when necessary.

Should you really need money and have little choice apart from dipping into your RRSP account, then try to withdraw from the RRSP in a tax-efficient manner.

It’s no surprise then that young Canadians prefer not to touch their RRSPs, continuing with contributions until they reach 71.

Find out how to minimize tax on RRSP withdrawals and how much those taxes will cost in this article.

Other types of RSPs

There are other types of RSPs that you can use instead or use in combination, if you have the funds:

Tax-free Savings Accounts

Tax-Free Savings Account (TFSA) is a recent addition to RSPs available to Canadians. While this doesn’t have to be used exclusively as a retirement account, the TFSA functions well as one.

Like the RRSP, the TFSA also has contribution limits set by the CRA, and any unpaid contribution amounts carry on to the next year.

Benefits of the TFSA include:

• All TFSA earnings are tax-free, but TFSA contributions are not tax-deductible
• Earnings from other investments held in a TFSA are likewise tax-free and do not have to be declared in your income tax statement
• As with the RRSP, any investment earnings held in a TFSA have a tax shelter and do not need to be declared in your income tax statement.
• Withdrawals are not subject to tax and do not need to be in your income tax statement

As a caveat, you should avoid over-contributing to your TFSA. Any excess amount will be taxed until the time you withdraw it from your account.

Also, unlike RRSPs, financial institutions may not provide you with contribution receipts. Keep track of your contributions to avoid over-contributing and getting taxed for it.

Registered Pension Plans (RPPs)

This is a pension plan that some employers set up for their employees. Registered pension plans are usually of two types:

1. Defined Benefit (DB) Plans

These plans are designed to pay a specific pension amount. The amount to be paid is computed with a formula that accounts for the employee’s age, years of service, and earnings history. A DB Plan does not usually allow employees to contribute to it nor does it earn interest.

2. Defined Contribution (DC) Plans

DC Plans can be considered the opposite of DB plans. DC plans base their pension benefits on the employee contributions and earnings on investments for the plan.

While these plans may have their benefits, RPPs are not without caveats; employees who make contributions to an RPP can have an impact on their RRSP contribution limits.

Pension plans fall under the jurisdiction of the province where the company is located. There are special rules on the RPPs of federal employees or companies with employees in more than one province. In these cases, employees can ask their company’s plan administrator or HR department to know more about the specific rules and provisions on their RPP.

Non-Registered Accounts

Similar to an ordinary savings account, non-registered accounts offer no tax benefits. Investment earnings and losses are subject to taxes, and the taxes on these can vary depending on the investment.

One advantage of non-registered accounts is that they’re allowed to hold a much wider variety of investments compared to registered ones. If you have any RRSPs, TFSAs or RRIFs, the CRA lists the prohibited investments for these registered accounts. Some of the restrictions may not apply to non-registered accounts.

Other benefits of a non-registered account include:

• Minimum age limit to open a non-registered account is 18 years old
• No limit to the amount or frequency of contributions
• No account closure when account holder reaches a certain age, as in the case of the RRSP

Non-registered accounts are also good to use when you’ve used up all the tax advantages of your other registered accounts.  

What are the benefits of an RSP?

Getting any Retirement Savings Plan can help you save for your retirement. Saving early and in a manageable amount can help cushion you from any market risk on any other assets or investments you have.

In addition, by having an RSP, you give yourself some room to save enough money that can someday help you manage the rising costs of living when you retire.

A good strategy for your RSP is to have both an RRSP and a TFSA as you save for the future. Or at the very least, have an RRSP and contribute to it regularly, just as more young Canadians are doing.

Should you make contributions to an RRSP even if you have a low income?

The easy answer is yes. Waiting for your income to reach a higher, more substantial amount and making larger contributions isn’t the best strategy. As you put off contributions to your RRSP, you miss the opportunity for your RRSP to grow without paying taxes on it.

Don’t wait to get a higher income instead of continuously contributing to your RRSP, even if they’re small amounts. To max out the benefits of your RRSP even with a low income, keep making contributions but hold off on claiming the tax deductions in the year they’re earned. This video explains the strategy best:

Is an RSP and RRSP the same for tax purposes?

Yes. Given that most financial institutions use the RSP and RRSP terms interchangeably, they both mean the same thing.

RSP is what most people may use, but the term RRSP or Registered Retirement Savings Plan is an official acronym used mostly by government entities, financial institutions, and other concerned authorities.

For more information on RSPs, RRSPs, and other investment tools to help you prepare for retirement, bookmark our page on Retirement Solutions.

Now that we’ve mapped out the difference between RSP vs RRSP, which investment tool do you see yourself using for your retirement savings plan? Do you think an RRSP is enough for your retirement? Or do you intend to pair it with a TFSA or other RSPs? Let us know in the comments!