What's the difference between RRSP and RSP accounts?

RSP

A Retirement Savings Plan (RSP) is any financial product that helps you save for retirement. There are many different ways for you to save money for your future through an RSP.

RRSP

A Registered Retirement Savings Plan (RRSP) is a specific type of RSP but with distinct features. You can get tax breaks but you can invest only a certain amount in your RRSP account every year.

Sounds confusing right? Let's dig a little deeper and try to understand them individually.

Here are few things you should know before considering RRSP as a retirement savings option:

Not all financial institutions can sell an RRSP. They need to get approval from Canada Revenue Agency (CRA).

Your RRSP account has a Contribution Limit. You can invest only a certain amount in this account.

Your RRSP contributions are tax-deductible. The amount you contribute to RRSP is reduced from your taxable income.

The contribution limit is either 18% of pre-tax earnings from the previous calendar year's income or the limit set by CRA, whichever is lesser.

The money inside your RRSP grows tax-free while it is inside your account through the power of time and compound interest.

Any unused contribution room from the current year gets carried forward to next year.

You can withdraw money from your RRSP account but...

• You will have to pay taxes and the taxes can be pretty heavy based on the amount you withdraw.

• You will lose your contribution room — CRA lets you count the contribution only once. Any amount withdrawn cannot be added back to the existing contribution room.

The Retirement Savings Plan (RSP) options that are available to us apart from RRSP are:

• Registered Pension Plan (RPP)

• Tax-Free Savings Account (TFSA)

• Non-Registered Accounts

Let's take a deep-dive into each of these options.

• Employers set up this pension plan for their employees.

• There are two types of RPP: Defined Benefit (DB) & Defined Contribution (DC).

• Defined Benefit (DB): Promises a set pension amount based on age, years of service, and earning history; Employees cannot make contributions to this account.

• Defined Contribution (DC): Pension is provided based on contribution and investment earnings. Employees can make contributions to this account.

Contributions to an RPP have an impact on RRSP Contribution Limits

TFSA can be used for retirement savings but, it is not limited to that purpose alone. A few points to know before opening a TFSA:

• CRA sets a contribution limit each year.

• Unused contribution room can be carried forward to next year.

• Contributions are not tax-deductible — they don't reduce your taxable income for your current year.

• But, the interest earned by your contribution is tax-free.

• Withdrawals are non-taxable.

• Non-Registered accounts are similar to a savings account — both contributions and interest earned are fully taxable.

• The advantage of a Non-Registered account is that they are permitted to hold a wider array of investments than a registered account .

• This can be also be used as a supplementary account after using up all the tax advantages.

  

If you're interested in starting one of these accounts: