RSP or RRSP: What’s the difference?
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When it comes to financial planning for your retirement, it’s essential to be aware of the many options available in Canada. However, the names and acronyms of financial products can often be confusing. If this is the case, you’re not alone. For example, you’ve probably heard of RSP or RRSP. Perhaps you’ve used them interchangeably. They may sound similar, but they’re not. That’s what we explain in this article.
RSP or RRSP: What's the difference between these savings plans?
A Retirement Savings Plan (RSP) allows you to save for retirement through several types of accounts. On the other hand, a Registered Retirement Savings Plan (RRSP) is an account used to save for retirement on a tax-sheltered basis. However, RRSP contributions are limited to 18% of the previous year’s eligible earnings, up to the RRSP contribution limit set by the Canada Revenue Agency (CRA).
The RRSP is one of many accounts that are part of an RSP, along with the registered pension plan (RPP) and many others. In other words, an RSP is a type of RSP, but an RSP is not (always) an RSP.
To make matters even more complex, there are differences between “registered savings plan”, “retirement savings plan” (RSP) and “registered retirement savings plan” (RRSP). Note that the term “registered” is sometimes included, sometimes not. The same applies to the term “retirement”. This is where the main differences lie.
What is a registered savings plan?
As the name implies, a registered savings plan is a savings plan that is “registered” with the Canada Revenue Agency (CRA) because of certain tax rules. However, not all “registered savings plans” are related to financial planning for retirement. The best-known are:
What is a retirement savings plan (RSP)?
A Retirement Savings Plan (RSP) is a set of accounts designed to provide you with an income at retirement. As mentioned earlier, the best-known RSP account is the Registered Retirement Savings Plan (RRSP). But it can also be a Registered Retirement Income Fund (RRIF) or a Registered Pension Plan (RPP), if you have one with your employer. In other cases, you could plan your retirement with a Tax-Free Savings Account (TFSA). In short, when we say “retirement savings plan”, we’re talking about a fairly broad category of accounts.
What is a Registered Retirement Savings Plan (RRSP)?
The Registered Retirement Savings Plan (RRSP) is a savings plan designed specifically for financial retirement planning. It allows you to save tax-free, reduce your taxable income and obtain a tax refund. You can contribute to your RRSP or your spouse’s RRSP (married or common-law) according to your contribution room and the RRSP contribution limit set by the CRA. To this must be added your unused contribution room from previous years.
RRSPs offer many advantages:
- Defer tax on disbursement (tax-sheltered investment growth)
- Obtain a tax refund (tax-deductible contributions)
- Defer tax deductions – if necessary
- Invest in stocks, bonds, exchange-traded funds (ETFs), mutual funds, etc.
- Withdraw tax-free amounts to facilitate first-time home ownership (HBP) and education incentives (LLP) – as needed
RSP or RRSP – Can You Get a Tax Deduction With Registered Savings Plans?
As we saw earlier, RSPs represent a fairly broad category of accounts. What’s more, not every contribution to an RSP is eligible for a tax deduction or other tax benefit.
For example, you can benefit from a tax deduction when you contribute to your RRSP. However, you don’t get a tax deduction when you contribute to your TFSA.
On the other hand, you don’t get a tax deduction when you invest your money in a non-registered account (also known as a cash account). But you do get tax advantages on the returns generated in this account, such as capital gains, of which only 50% is taxed (at your marginal tax rate). As a result, most investors will first maximize their TFSA and RRSP before investing in their non-registered account. But the tax advantages of a non-registered account are quite attractive.
Finally, your RPP contributions have an impact on your RRSP contribution room, because of the pension adjustment. This information will appear on your Notice of assessment.
RSP or RRSP – What are eligible investments in Canadian savings plans?
You can open a savings plan (registered or not) at several financial institutions in Canada, including :
- Bank
- Credit Union
- Insurance company
- Trust company
- Robo-advisor (e.g. Wealthsimple Managed Investing)
- Online brokerage platforms (e.g. Wealthsimple Trade, Questrade and Qtrade Direct Investing)
However, investment choices vary depending on the location you choose. For example, with a financial advisor, you’ll generally be limited to your bank’s mutual funds. Conversely, with a brokerage platform, you’ll be able to invest your RRSP in stocks, exchange-traded funds (ETFs), and more.
There are many eligible investments in a savings plan:
- Cash
- Savings account
- Guaranteed Investment Certificates (GICs) (e.g. Tangerine GIC and EQ Bank GIC)
- Money Market funds
- Mutual funds
- Government or Corporate obligations
- Company shares (stocks)
- Exchange Traded Funds (ETFs)
- Asset allocation ETFs
- Buy and Sell options
- Real estate investment trusts (REITs)
Bottom Line
In short, RSPs and RRSPs are two confusing acronyms. Although their names are similar, they are different. On the one hand, the Retirement Savings Plan (RSP) is a set of accounts designed to provide income in retirement. The Registered Retirement Savings Plan (RRSP) is the best-known of these retirement savings accounts. But there are many others, such as the Registered Retirement Income Fund (RRIF) and the Registered Pension Plan (RPP). The RSP is a type of RSP, but an RSP is not (always) an RSP.
Frequently Asked Questions
Who is eligible for an RRSP?
There is no minimum age to contribute to an RRSP. However, you must be a Canadian resident with a Social Insurance Number (SIN). In addition, you must have earned employment income and filed an income tax return. Finally, you must be under 71 years of age.
How do RRSPs work in retirement?
RRSP contributions end no later than December 31 of the year in which you turn 71. Your RRSP must then be converted to a Registered Retirement Income Fund (RRIF) to begin the disbursement. The tax payable will be determined by your RRSP/RRIF withdrawals and several other factors.
What is the return on an RRSP account?
An RRSP is not an investment and has no expected return or interest rate. Rather, it’s a retirement savings plan in which you can make investments that earn a return in the form of interest income, dividends or capital gains.
TFSA or RRSP: Which to choose?
There’s no one-size-fits-all answer. Depending on your personal situation and financial goals, it may be best to contribute to your TFSA, your RRSP, or both.
