RSP vs RRSP: What's the Difference?

Often both RSPs and RRSPs are used interchangeably, but they are not one and the same.

This article will explain the main differences between the two and help you pick the right account for saving money. Let's get started.

Wat is the Difference between a RSP and an RRSP?

The main difference between a retirement savings plan (RSP) and a registered retirement savings plan (RRSP), is than an RSP is a catch-all term for different accounts that encourage you to save for retirement, while an RRSP is a specific type of account that provides you benefits to save for retirement. 

While many people use these two terms interchangeably, they don’t mean the same thing. The key differences between the two are as follows: 

• An RSP can be any account that you open to save money for retirement. It could be an RRSP, a TFSA, or just a regular savings account.
• An RRSP is a specific account registered with the government that lets you delay paying taxes until later and reduce your taxable income now.

To sum it up, an RRSP is just one of the many types of RSP you can use to save for retirement. Or to put it differently, all RRSPs are an RSP but not vice-versa. 

What is a Registered Savings Plan?

In Canada, any plan registered with the Canada Revenue Agency (CRA) is referred as a “registered” plan. These plans have special tax rules to encourage Canadians to save money. There are different types of registered plans, and not all of them involve saving for retirement. Examples of Registered Savings Plan include: 

• Tax-free Savings Account (TFSA)
• Registered Retirement Savings Plan (RRSP)
• Registered Disability Savings Plan (RDSP)
• Registered Education Savings Plan (RESP)

Some of the common features of a Registered Savings Plan are: 

• Your savings grow tax-free 
• You get a tax break on your investments
• There is a cap on how much you can contribute each year
• They are ideal for medium- and long-term financial obligations

What is an Retirement Savings Plan (RSP)?

An RSP encourages you to save for your retirement. Contributions up to the maximum limit are tax-deductible based on your personal marginal rate. For example, if you deposit $1,000 in an RSP and have a marginal rate of 42.41%, you will get a tax break of roughly $424. You do not have to pay to tax on the contributed amount and interest gain until you withdraw the funds. 

When you access this money, you will pay tax based on your marginal tax rate at that time. If you are like most people, your income in the retirement years will be significantly less than what it is now, when you are working full-time. This means withdrawing funds parked in an RSP after retirement allows you pay less tax. 

There are different types of retirement savings plan. Which one of them will be best on you depends largely on your long-term goals and personal situation. 

Four of the most common RSPs are: 

• Registered Retirement Savings Plan
• Tax-Free Savings Account
• Registered Pension Plan (available in two sub-types: Defined Contribution (DC) or Defined Benefit (DB))
• Non-registered accounts

What is a Registered Retirement Savings Plan (RRSP)? 

A Registered Retirement Savings Plan is a retirement savings vehicle that gives you an opportunity to grow your money on a tax-deferred basis. In spite of the word “savings” in its name, an RRSP is more than a savings account. You can put many types of assets besides cash in it, including GICs, stocks, ETFs, real estate, and mutual funds. 

Let’s look at its eligibility, main features, and advantages. 

Eligibility

You can open an RRSP if you: 

• are a resident of Canada and have a valid SIN

• have employment income
• have filed income tax

You don’t have to be of a particular age to set up an RRSP. However, some institutions may require you to be 18 years of age or older. If you are a minor and want to open an RRSP, you must submit a letter of consent from your legal guardian. 

Main Features

• RRSP contributions are tax deductible and all investment gains grow tax-free until withdrawn.
• The RRSP is subject to a contribution limit, which is 18% of your previous year’s income up to the annual maximum, which is $31,500 for 2023.
• Unused contribution room rolls over to the future years
• You can make contributions to your RRSP until Dec 31^st of the year you turn 71.
• RRSP withdrawals are subject to tax
• You can withdraw funds from your RRSP before it matures (age 71), but if you do so, you will incur substantial tax penalties.

Advantages 

• RRSP contributions reduce your taxable income. For every dollar you put into your RRSP, you’ll get a tax break on your return. Both the contributed amount and any investment gains on it are sheltered from tax until you start making withdrawals. 
• Unused contributions roll over. If you do not max out the contribution room one year, you can make a larger contribution to your RRSP the next year.
• Money parked in an RRSP is protected against creditor claims.
• In some situations, you can withdraw funds from your RRSP without paying tax. You may withdraw a certain amount from your plan to buy your first home or to pay education fees on a tax-free basis.  

What is a Tax Free Savings Account (TFSA)?

Eligibility

You can open a TFSA if you: 

• are a resident of Canada and have a valid SIN
• are of the age of majority in your province or territory

Features

• TFSA contributions are made with “after-tax” dollars, but the money earned on the investments held in it is not subject to tax, even when withdrawn.
• The TFSA is subject to contribution limit, which increases from time to time, depending on the inflation rate. (The contribution limit for 2023 is $6,500.)
• Your TFSA contribution limit starts the year you turn 18, regardless of the age of majority in your province or territory.
• Unused contribution room rolls over to subsequent years.
• The TFSA contribution limit is retroactive since 2009. If you turned 18 before 2009 and are opening your first TFSA only now in 2023, you can contribute up to $88,000 to catch up. 
• A wide range of investment options are permitted with a TFSA, including cash, GICs, stocks, ETFs, real estate, and mutual funds.

Advantages

• You can use your TFSA for various short-term and long-term goals as the money isn’t locked in, unlike an RRSP. A TFSA can help you save for big purchases, retirement, and almost everything in between. 
• You can carry forward unused TFSA contribution room into future years indefinitely
• Any income earned in a TFSA is tax-free.
• You don’t need to pay tax on your TFSA withdrawals and can withdraw the money at any time and for any purpose. 

What is a Registered Pension Plan (RPP)?

A RPP is a plan set up by your employer and registered with the CRA to provide you with pension benefits upon retirement. The employer — not you — get to select the financial institution and decide how the money in the plan is invested. A RPP can be either “contributory”, meaning the employer contributes to your plan each month, or it can be “non-contributory”, meaning all required contributions are made by you.

RSP and RRSP contribution and tax info

When you contribute money to your RRSP, you can claim a tax deduction for that amount when filing your taxes. This essentially means you will pay less tax. RRSP contributions are 100% tax deductible up to the RRSP deduction limit, which is the lesser of 18% of your previous year’s income or the current annual limit. 

As regards to an RSP, whether you can claim the contributions on the income tax depends on the type of RSP you have. While RRSP helps you reduce your tax burden, several other types of RSP, such as TFSA and non-registered investments, do not provide tax benefits. 

Types of Non-registered Accounts

Non-registered accounts are not subject to any tax benefits. All contributions are made with after-tax dollars. The upside is that these accounts can hold wider range of investments than registered saving plans and allow you to withdraw freely without penalty. Stocks traded in the over-the-counter markets, real estate, jewelry, and artwork are all examples of non-registered investments.  

Is an RSP or RRSP right for you?

Choosing the right type of investment account is important. Whether you should go with RRSP or some other type or RSP depends on your financial situation and goals.

If you want to save specifically for retirement, RRSP is your best option. On the other hand, if you want a multipurpose savings account that offers you greater flexibility, TFSA is more worthy choice. Once you’ve maxed out these accounts, it’s time to consider investing money in a non-registered account or a cash value life insurance plan.

Looking for more help with investing and life insurance options for Canadians? Reach out to a Dundas Life licensed advisor here today.

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Frequently Asked Questions (FAQs)

How many Canadians have a retirement plan?

Over 6.7 million Canadians have a retirement plan.

‍How does RRSPs work?

An RRSP is a registered savings account that you can open and contribute to for retirement purposes. Anyone who is a Canadian resident under the age of 71 and has earned income can start an RRSP. The money you in an RRSP is tax-deductible and investment income grows on a tax-deferred basis.

You can make contributions until December 31 of the year you turn 71. RRSP withdrawals are taxed as ordinary income, except when you take out money for the Life Long Learners Plan and Home Buyers Plan. You can hold many types of investments in an RRSP, including cash, GICs, stocks, ETFs, real estate, and mutual funds.

What are the RRSP and TFSA contribution limits?

The maximum amount you can put in an RRSP is 18% of the previous year’s income up to the annual maximum, which is $30,780 for 2023. The annual dollar limit for TFSA for the year 2023 is $6,500. 

Who should not invest in a retirement saving plan?

Low-income individuals may not benefit from investing from a retirement savings plan, such as the RRSP, as they cannot take advantage of the tax deductions these plans offer. 

Can I contribute to both an RSP and an RRSP?

Yes, you can invest in multiple retirement saving plans. However, there is limit on the total amount you can deduct. Most people prefer to maintain only one or two retirement saving plans, as it makes it easier to keep track of their retirement savings. 

How can contributing to an RSP or an RRSP affect my income tax?

Every dollar you put into an RSP or RRSP reduces your taxable income. Both the contributed amount and investment gains on this money are sheltered from tax until you start making withdrawals. This, in turn, helps you grow your savings faster.