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Difference between RRSP and RSP
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What Is The Difference Between RRSP And RSP?

The abbreviations RSP and RRSP are frequently used interchangeably. Both terms are typically used to describe RRSP accounts. Just keep in mind that while an RSP might be either an RRSP or another sort of RSP. It is comparable to how not all fruits are apples, despite apples being a sort of fruit.

While both accounts can be used to save for retirement, the main distinction between a Registered Savings Plan (RSP) and a Registered Retirement Savings Plan (RRSP) is that an RRSP allows account holders to contribute up to 18 percent of earned income from the previous year ($30,780 maximum for 2023) in a tax-free account that can be shared by a spouse or common law partner.

Your workplace may provide a Registered Pension Plan, and you may want to consider including it in your retirement planning. The term Retirement Savings Plan (RSP) can therefore apply to a variety of accounts connected to retirement saving.

What is an RRSP?

A Registered Retirement Savings Plan (RRSP) is a retirement savings and investment vehicle that is registered with the Canada Revenue Agency (CRA) and offers Canadians advantages to save for retirement. You pay less income tax since the funds you contribute to an RRSP aren’t included in your taxable income. If you invest the money in your RRSP, any income you generate is typically tax-free but when you make withdrawals from the account, you typically have to pay taxes.

RRSPs encourage long-term savings and it is flexible enough to allow for emergency withdrawals. You can withdraw money from your RRSP tax-free under the Property Buyers’ Plan (HBP) in order to purchase a home. You can also withdraw money from your RRSP through the Lifelong Learning Plan (LLP) if you or your partner is enrolled in full-time training or education.

You can open your RRSP account with a financial institution such as a bank, trust or insurance company, or credit union. Your financial institution is obligated to advise you on the types of RRSP and the investment portfolio you can spend you plan on.

You may decide to create a spousal or common-law partner RRSP. This kind of strategy can aid in ensuring that your retirement income is distributed more fairly among the two of you. The advantage of this is greatest if an RRSP is funded for a lower-income spouse or common-law partner by a higher-income spouse or common-law partner. While the annuitant, who will likely be in a lower tax rate in retirement, receives the income and declares it on their income tax and benefits return, the contributor benefits immediately from the tax deduction for the contributions.

As long as your money is still in your RRSP, most of the income you earn from investments is typically tax-free. When you withdraw money from the plan, or receive payments from it, you will have to pay taxes. Generally speaking, you won’t be able to withdraw money from locked-in RRSPs if you own one. Contact your RRSP issuer if you are unsure whether your RRSPs are locked in. You can take money out of your RRSPs whenever you want if they are not locked in.

The eligibility requirement for RRSP is straightforward. You must be a Canadian resident with a record of tax filing in Canada. You must be under 71 years of age with steady income. Fulfill all these criteria and you are eligible to open an RRSP account.

What is an RSP?

A Retirement Savings Plan (RSP) is a type of retirement savings account designed to provide you with income in retirement. The Registered Retirement Savings Plan, sometimes known as the RRSP, is the most well-known of these accounts. The other type of RSP is the Tax-Free Savings Account (TFSA). Retirement planning also includes the possibility of converting your Registered Retirement Savings Plan (RRSP) into a Registered Retirement Income Fund (RRIF). Your workplace may provide a Registered Pension Plan, and you may want to consider including it in your retirement planning. The term Retirement Savings Plan (RSP) can therefore apply to a variety of accounts connected to retirement preparation.

Other Types of RSPs

1. Tax Free Savings Account (TFSA)

TFSAs retirement savings option that was introduced to Canadians in 2009. Unlike RRSPs (barring its 2 exceptions and the option of shouldering tax consequences), you’re not limited to retirement with this account. Since contributions made to your TFSA are made using after-tax money, they cannot be deducted from your taxable income. However, any income made within a TFSA is tax-sheltered (you don’t have to pay taxes on any income you make), and withdrawals are not subject to income tax reporting. You pay taxes now in order to avoid having to pay them later, which is exactly the opposite of RRSP.

The CRA sets annual contribution caps, which you can carry over if you don’t utilize them all. Your annual withdrawal cap will be increased by any withdrawals you make. The CRA’s contribution cap for 2022 is $6,000 per person. You’ll be charged an overcontribution fee, much like the RRSP, so it’s a good idea to be aware of your limit and make sure you keep within it. You can find out how much room you have to contribute this year in your CRA online account.

2. Registered Pension Plan (RPP)

If your employer makes retirement contributions on your behalf, they are probably made through an RPP. These can be fully or partially funded by your employer and are also known as employer-sponsored or corporate pensions.

It is crucial to keep in mind that any payments you make to an RPP will count against your allotted RRSP contribution amounts. This is known as Pension adjustments. Your employer or the province you live in may have an impact on key aspects of your RPP, such as when you can start seeing withdrawals or what happens if you quit your work early. For the most up-to-date information on this, it might be preferable to speak with your contact at work.

FAQ

An RSP is a more inclusive retirement savings plan that includes other types of retirement savings accounts like Registered Retirement Income Fund (RRIF), Specified Pension Plan (SPP), and Registered Pension Plan (RPP). RRSP is also a retirement account included in an RSP. Therefore, you can transfer RRSP to other types of accounts under RSP.

An RSP is a tax-advantaged retirement savings account that helps you save money for retirement. Your income determines your RSP contribution cap. You will not be taxed on the money you deposit into your RSP until you withdraw it since your contributions are tax deductible. RSPs are created with long-term savings plan in mind. RSP withdrawals are subject to tax and the rules of the investment you choose, even though you are free to take any amount of money out at any time.

Depending on the type of RSP account you have, you can make withdrawals from the RSP account you have as long as it is not locked in.

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Written by:

Jim Pan, CFP, MFA-P

Jim is a dedicated, fee and advice only independent Certified Financial Planner with a focus on supporting healthcare business owners during their crucial growth phase. His expertise lies in offering comprehensive solutions to minimize taxes while embracing a holistic approach. With a career spanning back to 2010, Jim has established a strong presence in the financial industry. He proudly holds a range of designations, including Certified Financial Planner (CFP), and Master Financial Advisor - Philanthropy (MFA-P). He is currently pursuing additional designations and qualifications to better serve his clients and community. Beyond his qualifications, Jim is a member and an esteemed participant in the Million Dollar Round Table (MDRT), an exclusive global association comprising the top 1% of financial advisors. Jim's commitment extends to the community, where he spearheads numerous charitable fundraising events and plays an active role in enhancing the well-being of others. Additionally, he has contributed significantly by serving on the board of the Canadian Mental Health Association in Vancouver. Currently, he volunteers with Junior Achievement of British Columbia (JABC) to present personal finance topics to youths.

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