Retirement Savings Plans (RSP) and Registered Retirement Savings Plans (RRSP) are sometimes used interchangeably, but there are important differences between RSP and RRSP. An RSP is a broad category that includes many different types of retirement savings accounts, of which an RRSP is one. What distinguishes an RRSP is that it is registered with the federal government and is designed to incentivize Canadians to save for their retirement by making RRSP contributions tax-deductible and allowing the investments in the plan to grow tax-free.
In this article, we discuss topics about the difference between RSP and RRSP, the features and benefits of an RRSP, types of RSPs, and financial solutions for your retirement if your RSPs are not enough.
RRSP vs RSP: Key Differences
What is an RSP?
An RSP is an umbrella term that includes a wide variety of retirement savings vehicles, such as an RRSP, a Tax-Free Savings Account (TFSA), a Registered Pension Plan (RPP), and non-registered savings accounts. All of these accounts can be used to help Canadians save and invest for retirement, when they may no longer be able to rely on their employment earnings to meet their needs. Some RSP accounts offer tax advantages, while others are strictly savings vehicles with no tax benefits. See “Types of RSPs” (below) to learn more about the distinguishing features of different RSPs.
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is an investment in your future. With Canadians living longer and spending much more time in retirement than ever before, investing in an RRSP is one of the best ways to ensure you’ll have enough money to last during your retirement years. That’s why the federal government encourages Canadians to contribute to their RRSP through incentives such as tax breaks. Here are some of the main benefits and features of an RRSP.
Features and Benefits of an RRSP
Contributions are tax-deductible. Contributions to an RRSP are tax-deductible, helping to reduce your taxable income and lower your tax bill.
Your savings grow-tax free. The savings and investments in your RRSP grow tax-free and allow you to take advantage of compound growth. Although the assets within the plan are eventually subject to tax, this does not typically occur until withdrawals are made in retirement. By that time, you will likely be in a lower tax bracket, and the withdrawals will be taxed at a lower rate.
Flexible investment options. RRSPs offer a wide range of investment options, including stocks, bonds, mutual funds, and Guaranteed Investment Certificates (GICs), which allow you to align your investments to your goals and risk tolerance.
Control over contributions. Individuals can choose how much they want to contribute to their RRSPs each year, based on current limits. For the 2023 taxation year, you are allowed to contribute $30,780, or 18% of your earned income the previous year, whichever is lower. Any amounts not contributed can be carried forward indefinitely, allowing you to catch up on missed contributions.
Spousal RRSPs. A spousal RRSP allows one spouse or common-law partner – typically the higher-income spouse – to contribute to the lower-income spouse’s RRSP, up to their personal contribution limit. This can help to balance retirement incomes between spouses and take advantage of lower tax rates.
Types of RSPs
Although an RRSP is one of the most important types of RSPs, there are others that you can take advantage of to save for retirement.
Tax-Free Savings Account (TFSA)
A TFSA is a type of savings plan that allows you to save and invest money on a tax-free basis. The TFSA contribution limit for 2023 is $6,500. Contributions to a TFSA are not tax-deductible, but all investment income earned within the plan grows tax-free and does not affect your contribution limits. Withdrawals from a TFSA are also tax-free and there are no penalties incurred. Plus, any withdrawals from your TFSA can be contributed back to your account in future years. For instance, if you withdraw $5,000 this year to help with expenses, you will be allowed to carry that amount forward. These benefits make the TFSA an attractive and flexible way to save. Importantly, income earned in a TFSA and any amounts withdrawn do not affect your eligibility for income-tested benefits such as Old Age Security (OAS).
Registered Pension Plan (RPP)
A Registered Pension Plan (RPP) is an employer-sponsored pension plan that is registered with the Canadian government. RPPs are intended to provide a source of income for employees during their retirement years. There are two types of RPPs.
Defined Benefit Plan.
Defined benefit plans provide a specific benefit to the employee upon retirement, based on a formula that takes into account the employee’s salary and length of service. The employer bears the investment risk and is responsible for ensuring there are sufficient funds to pay the defined benefits.
Defined Contribution Plan.
Defined contribution plans determine the benefit to an employee based on the amount the employee contributed to the plan during their working years and the investment returns earned on those contributions. The employee bears the investment risk and typically has control over how their contributions are invested.
Both types of RPPs provide tax-deferred growth on contributions and investment earnings until the employee retires and starts receiving benefits from the plan. At that point, the payouts are taxable.
As the name implies, a non-registered account is not registered with the federal government. That means that any investment income earned within a non-registered account is subject to tax. Although there are no tax benefits, non-registered accounts have no contribution limits and are flexible in terms of the types of investments that can be held. There are a range of non-registered accounts, from savings accounts to self-directed brokerage accounts. A non-registered account is especially useful if you have maxed out your TFSA or RRSP contributions and are looking to boost your retirement savings.
What if your RSPs are not enough?
Personal retirement savings are one of the pillars of retirement income, along with company pensions and old age pensions. But sometimes volatile financial markets can derail our retirement savings plans. What’s more, not everyone has a company pension plan to fall back on. When you factor in the high cost of living, it can be a challenge to live your desired lifestyle in retirement.
That’s why the CHIP Reverse Mortgage by HomeEquity Bank is growing in popularity. The CHIP Reverse Mortgage is a financial solution that allows Canadians 55+ to access up to 55% of their home equity in tax-free cash.
You can choose to receive the tax-free funds as a lump sum or in regular monthly deposits, and can use the cash for any of your financial needs, including:
- Funding your retirement lifestyle
- Debt consolidation
- An emergency fund for unforeseen health care costs
Learn more about how a CHIP Reverse Mortgage works, and/or call us toll-free at 1-866-522-2447 to see whether it’s the right solution for your cash-flow needs in retirement