RPP vs RRSP: Answered

Find out the difference between an RRP and a RRSP.
RPP vs RRSP
Article Overview

Do you have RRSP or RPP? Perhaps you are confused by these 2 terms and how they come about. This article is to help you uncover the differences and ensure you are aware of the pros and cons for both accounts.

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RPP vs RRSP

RPP and RRSP are both retirement planning tools that you can use to save for your retirement days. However, they have distinct features that differentiates them and depending on your income and other financial situation, you can go for any of the two as your retirement plan. Let us take a look at the differences between these two plans for a batter understanding

What is the Difference Between RPP and RRSP?

  1. An RRSP is a retirement savings account that is opened and controlled by individuals while an RPP is opened and controlled mostly by your employer. The employer decides the financial institution and investments to be made with the account.
  2. With the RRSP, you cannot make additional contributions when you turn age 71.. At that age, you are expected to do one of 2 things; terminate the account and pay all the outstanding taxes or convert it to a Registered Retirement Investment Fund. The latter is an additional tax-deferred retirement savings vehicle that only permits a portion of income to be deferred. An RPP plan includes instructions on the proper retirement age and the time frame for disbursements.
  3. There is the opportunity for your employer to add their contributions to your RPP and even math your contribution amount. This is not present in RRSP as it is and individual-based account that only you or your spouse or common law partner can make contributions.
  4. To qualify for an RPP, you must be working for an employer and must be earning income after minimum requirement of work hours have been met. This is not required with the RRSP account.
  5. The funds in an RPP account is locked in and cannot be accessed by you until you retire. This is mainly because the account was opened by your employer. You can however access your funds anytime you want with an RRSP account.

What is a Registered Pension Plan (RPP)?

An RPP is an employer-based retirement savings plan. As such, the employer creates the plan with a financial institution so that employees can make pre-tax contributions to it. The institution that manage the retirement plan and the investment opportunities that the fund can be sued for are both under the purview of the employer to make decisions on. To help their employees’ savings grow even faster, many employers match their employees’ contributions to the retirement plan. After retiring, the employee receives regular payments from the plan and is required to pay tax on the money when that time comes.

RPP is classified into two different types namely; Defined benefit and money purchase RPPs. With no annual investment cap, defined benefit plans specify the precise pension that the retiree would receive and adjust contributions to meet. Employers and workers may make contributions to money purchase RPPs, which are subject to contribution caps, without designating a pension amount.

Pros of RPP

  1. Your contributions in your account can be matched by your employer – Your employer has the liberty to make the same contribution amount as you into the RPP.
  2. Your employer will take pre-tax deductions for your contributions from your paycheck– Your contributions into the RPP are not taxed because it has already been deducted directly from your paycheck. Hence, the tag pre-tax contribution.
  3. For as long as they are in the account, the money grows tax-free – Earnings in your RPP are not considered income so they are not taxed. Taxation only comes at the point of withdrawal.
  4. Some RPPs provide a retirement pension guarantee of a specific amount – The defined benefit type of RPP states the specific amount to expect at the end of your retirement.

Cons of RPP

  1. You are not in the position to determine the financial institution or plan that is used – With this retirement plan, your employer makes most of the decisions which include the financial institution to open the account with.
  2. To be eligible, you must work a minimum amount of hours each week as a full-time employee – Because the RPP is an employer based plan, it can only be subscribed to by people who have a job and also work the minimum requirement of workhours.
  3. Some RPPs have a contribution cap based on a percentage of incomeThe money purchase type of RPP has a contribution limit which is either 18% of your income on the CRA annual limit. The lesser one is used and the contribution cap for this retirement plan.
  4. Until you retire, your money will probably be “frozen in” the fund – The contributions in an RPP is locked and inaccessible to you until you retire. This is part of the control exercised over the account by your employer.

What is an Registered Retirement Savings Plan (RRSP)?

RRSPs are individual retirement savings plans that has nothing to do with your employer. You create the strategy on your own with a Canada Revenue Agency (CRA) approved financial institution. In this type of retirement plan, you and your spouse or common-law partner may make contributions up until you both turn the age of 71, after which time withdrawals must be made by converting the plan to a different kind of retirement savings account.

Similar to the RPP, contributions can be made pre-tax which means that when you deposit money into the account, you do not have to worry about paying taxes on it. You do, however, have to pay tax on withdrawals that you make, much like the RPP. Your spouse can also make contributions into your RRSP account and vice versa.

Pros of RRSP

  1. You are free to make the choice on which financial institution you want to save money with – Unlike the RPP, you are in charge of major decisions concerning the account including the financial institution you want to open with and the type of investment you want your money put in.
  2. You are not subject to any penalties while making taxable withdrawals – Unlike the RPP where you will be penalized for making early withdrawal, you can make your withdrawal anytime from your RRSP account. However, the withdrawal will be subject to tax.  
  3. You can also make contributions to your spouse’s RRSP and vice versa – You are allowed to make contributions to your spouses RRSP and you enjoy tax deductions for every contribution you make.
  4. Contributions that exceed the cap may be carried over to the following year – Where you makeover the cap contribution in a year, it will rollover into the next year’s contribution tax deferred.

Cons of RRSP

  1. The employer match is absent in this plan – There is no employer’s contribution in this type of plan. It is an individual-based plan that only you and maybe your spouse makes contributions.
  2. The maximum contribution is capped at a certain proportion of income – There is always a limit to the contributions you can make to this retirement account. In 2021, the limit was 18% of earned income reported in your tax filings for the previous year.
  3. If you also make contributions to an RPP, your contribution cap can be lowered – Having both RPP and RRSP will reduce your contribution limit for your RRSP account. It affects your RRSP because that is the account you control. The CRA will reduce your contribution to your RRSP by what is called a pension adjustment amount which represents the value of the pension benefits you earned in the previous year.
  4. You can only make contributions up until you turn 71 years old – The age limit for RRSP contribution is the December 31st of the year you clock 71 years of age. When this happens, you are expected to withdraw the funds in the account and transfer it into a RRIF or use it to purchase an annuity. Further contributions will be restricted after this date.

FAQ

This depends on the circumstances of each individual. For those whose employers ware willing to open an RPP account, they may decide to go with that plan. An individual that has an unwilling employer may decide to go with the RRSP. However, the RRSP is slightly better because you get to make all the decision regarding the retirement savings account as against RPP where the employer decides most of it.

Contributions made under the RPP are locked in and not accessible until you retire. You will also be taxed on your withdrawals at that point. It is part of the characteristics of the RPP where the employer holds power for majority of the decisions concerning the account.

The RRSP has some transfer restrictions from other retirement savings plan. One of those restrictions apply to RPP. You are not allowed to transfer or convert your funds from your RPP into RSSP. The major reason for this is because RPPs are always locked and inaccessible until you retire. Other restrictions to RRSP include Specified Pension Plan (SPP),Registered Retirement Income Fund (RRIF), and Deferred Profit-Sharing Plan(DPSP).

Withdrawals made on a RPP after retirement are taxable.

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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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