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RSP vs. RRSP: The differences between the retirement plans

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While often used interchangeably, there is a difference between an RSP vs RRSP. This article will explain what makes these two terms unique and how they overlap.

I hear it all the time: “What’s an RRSP?” and “I have to buy RSPs before the deadline!” I once thought these terms could be used interchangeably, but there is a difference between an RSP vs. an RRSP. This article will explain what makes these two terms unique and how they overlap.

What are RSP and RRSP accounts?

An RSP stands for Retirement Savings Plan. It can signify several different accounts you can use to save for retirement. An RRSP – or Registered Retirement Savings Plan – is just one of several accounts under the RSP umbrella.

So, an RRSP is an RSP, but an RSP doesn’t necessarily refer to an RRSP. Got it? How meta.

Other registered savings plans include accounts such as the TFSA (tax-free savings account), a registered pension plan (RPP), which include defined benefit pension plans and defined contribution pension plans, and non-registered (or taxable) accounts.

Can you claim RSP on income tax?

It depends on where you put your money. When you contribute to an RRSP, you receive a tax deduction that lowers your net income by your contribution amount. However, not all RSP contributions allow you to claim a tax break.

The easiest example is a contribution to your TFSA. These are made with after-tax dollars, so the contributor does not receive an immediate tax benefit. The advantage comes later when it’s time to withdraw the funds. Any growth inside your TFSA is tax-free, and it is tax-free upon withdrawal as well.

Contributions to non-registered investments don’t receive any tax benefits either. For that reason, most investors tend to max out their available RRSP and TFSA room before opening a non-registered account for investing purposes.

While you can’t claim a tax deduction for contributing to a non-registered RSP, there are other tax breaks, such as capital gains only being taxed at 50% of the investor’s marginal tax rate. On the other hand, capital losses can be used to offset capital gains – carried back three years and forward up to 10 years.

Registered Pension Plans (RPP) contributions do impact your RRSP contribution room through something called the pension adjustment (PA). Each year, your pension contributions and adjustment are reported on your T4 slip to the Canada Revenue Agency, which will advise you of the maximum RRSP contribution you can make each year.

Related: How to get more money back from your tax return

So, can you claim an RSP contribution on your income tax? Here’s the breakdown to help you remember:

RSP
Tax Deduction?
RRSP
Yes
TFSA
No
Non-Registered
No
RPP
Yes

RRSP: All you should know

Any Canadian who has earned income can and should file a tax return to start building an RRSP contribution room. You can contribute to an RRSP until December 31 of the year you turn 71.

An RRSP lets you contribute up to 18% of your previous year’s earned income (to an annual maximum of $29,210 for 2022). If you can’t use up your entire RRSP contribution room in a given year, fear not. The unused contribution room can be carried forward indefinitely.

However, watch out for over-contribution, as the taxman levies a stiff 1% penalty per month for contributions that exceed your deduction limit. The good news is that the government built in a safeguard against possible errors, so you can over-contribute a cumulative lifetime total of $2,000 to your RRSP without a tax penalty.

Find your RRSP deduction limit on your latest notice of assessment or view it online using CRA’s My Account service.

Claim a tax deduction for the amount you contribute to your RRSP each year to reduce your taxable income. Note that just because you made an RRSP contribution doesn’t necessarily mean you have to claim the deduction in that tax year. It might make sense to wait until you are in a higher tax bracket to claim the deduction.

Related: A guide to RRSPs

Why contribute to your RRSP

There are two no-brainer reasons to contribute to an RRSP. The first reason is when your employer offers a matching program, such as with a group RRSP. Check if your employer offers an RRSP match and aim to take full advantage. For instance, some companies match up to 3% of salary for employee contributions. Say you make $60,000 per year? That means your employer will match RRSP contributions up to $1,800. Don’t turn down free money.

The second reason it makes sense to contribute to an RRSP is when it’s obvious you’re in a higher tax bracket now than you’ll be in retirement. RRSPs work best as a tax-deferral strategy, meaning you get a tax deduction on your contributions today, and your investments grow tax-free until it’s time to withdraw the funds in retirement. That’s when you’ll hopefully be taxed at a lower rate. So contributing to your RRSP makes more sense during your high-income working years than when you’re just starting in an entry-level position.

RRSPs work best when you consider how contributions and withdrawals will benefit you the most from a tax perspective. If you’re a DIY investor who wants to save on fees, you can start by opening an RRSP account with one of the best online brokerages in Canada. Or you can pay a little more and outsource the work to one of the best robo-advisors in Canada.

The difference between RSP vs. RRSP

We’ve touched on how RSP is an umbrella term for retirement savings plans, including RRSPs and many other accounts. Here’s a quick overview of those accounts and how to use them to save for retirement:

RRSPs for retirement savings

The cornerstone of retirement planning for Canadians, RRSPs have been around now for more than 60 years. As an investor with a decent (and hopefully rising) income, your goal is to max out your RRSP contribution limit each year. While it’s tough to get there in your early working years, all that unused contribution room carries forward and can be used in your higher salary years.

I caught up on my unused RRSP contribution room with a couple of year-end bonuses, plus a few years of forced automatic contributions designed to max out all that available room. The contributions were key to lowering my net income in those higher-income years, thanks to the RRSP tax deduction.

Once your savings rate is higher, it should be much easier to max out the deduction limit of 18% of your salary. Where do you park any extra savings? Let’s move on down the list.

TFSAs for retirement savings

Every Canadian 18 years or older should open a TFSA and try to save the annual contribution limit, which varies yearly. For 2022, the annual contribution limit is $6,000. Canadians who were at least 18 years of age in 2009 can have up to $81,500 total in a TFSA. Like RRSPs, any unused TFSA contribution room carries forward into future years. So, if you haven’t been able to max out your room each year, there is still time to catch up in the coming years.

Many people use their TFSA for safe investments and short-term, emergency fund-like savings. That’s perfectly fine, but know that you can also use your TFSA as a retirement savings plan. Inside, you can hold a myriad of investments, including stocks, mutual funds, and ETF investing.

Remember, no tax deduction for a TFSA contribution, but you won’t be taxed on any gains inside your TFSA or pay taxes when you withdraw the money later.

Related: A guide to TFSAs in Canada

Non-registered accounts for retirement savings

Once you’ve maxed out your RRSP and TFSA accounts, it’s time to look at opening a non-registered investment account and using it to save for retirement. You can open a non-registered account at any discount brokerage, fund it from your chequing account, and start trading stocks or ETFs.

Note that you will not receive a tax deduction for contributing to a non-registered RSP, so plan accordingly. There can be favourable tax treatment inside, such as capital gains, capital losses, and the dividend tax credit.

Yes, many Canadians invest in blue-chip dividend-paying stocks inside their non-registered investment account, specifically to take advantage of the dividend tax credit, which taxes dividends more favourably.

RPPs for retirement savings

While defined benefit pensions are declining, defined contribution plans are rising. Like RRSPs, both plans offer tax breaks for contributions, and they will affect your RRSP deduction limit.

I used to work in the public sector and pay into a defined benefit plan. My pension contributions lower my net income for tax purposes and reduce my available RRSP contribution room to around $3,600 per year rather than 18% of my salary.

If you and your employer contribute to a defined contribution pension plan, then know that your employer’s contributions also count as your own for tax purposes and will impact your available contribution room.

The bottom line

So now you know that an RRSP is a type of RSP, but the two terms shouldn’t be used interchangeably. Falling under the umbrella of RSPs are RRSPs and other accounts such as TFSAs, non-registered accounts, and RPPs, which include pension plans. An RRSP is only one type of retirement account, but one that offers a tasty tax deduction.

The lesson here? All RSPs can serve a purpose in your retirement planning, and your best bet is to spread out the savings as much as possible. That way, you can rest easy knowing that all your bases are covered for your golden years.

Related: What are RRSPs, TFSAs, and RESPs anyway?

About our author

Robb Engen
Robb Engen, Author

Robb Engen is a leading expert in the personal finance realm of Canada and is also the co-founder of Boomer & Echo, an award-winning personal finance blog. You can find his monthly column in the Toronto Star’s Smart Money section or see him featured in well-known financial publications, like the Globe & Mail, Financial Post, MoneySense, CBC, and Global News. He is a fee-only advisor who helps Canadians at all different stages get their finances on track and prepare for retirement. Robb lives with his wife and two daughters, who keep his life and hands full, in Lethbridge, Alberta.

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