RRSP vs. RSP

Attribute	RRSP	RSP
Tax Deductibility	Yes	Yes
Contribution Limit	18% of earned income or maximum limit	18% of earned income or maximum limit
Withdrawal Taxation	Taxed as income upon withdrawal	Taxed as income upon withdrawal
Contribution Deadline	March 1st of the following year	December 31st of the current year
Carry Forward Unused Contribution Room	Yes	Yes
Spousal Contributions	Allowed	Allowed
Home Buyers' Plan (HBP)	Allowed	Allowed
Lifelong Learning Plan (LLP)	Not allowed	Not allowed

Introduction

Registered Retirement Savings Plans (RRSPs) and Registered Savings Plans (RSPs) are both popular investment vehicles in Canada that offer tax advantages for individuals saving for retirement. While they share similarities, it is important to understand the differences between the two to make informed decisions about which option suits your financial goals and circumstances.

Eligibility and Contribution Limits

Both RRSPs and RSPs have eligibility criteria and contribution limits. RRSPs are available to Canadian residents who have earned income and file a tax return. The contribution limit for RRSPs is based on a percentage of your earned income, up to a maximum limit set by the government. RSPs, on the other hand, are available to non-residents of Canada who have earned income in the country. The contribution limit for RSPs is also based on a percentage of earned income, but it may differ from the RRSP limit.

It is important to note that RRSP contribution limits can be carried forward to future years, allowing individuals to catch up on unused contribution room. RSPs, however, do not offer this carry-forward option, so it is crucial to maximize contributions within the given year.

Tax Deductibility

One of the key advantages of both RRSPs and RSPs is the tax deductibility of contributions. Contributions made to RRSPs can be deducted from your taxable income, reducing the amount of income tax you owe for the year. This deduction can result in a tax refund or lower tax payable. Similarly, contributions made to RSPs are also tax-deductible, providing the same benefits for non-residents of Canada.

However, it is important to consider the tax implications upon withdrawal. RRSP withdrawals are subject to income tax at your marginal tax rate at the time of withdrawal. RSP withdrawals, on the other hand, are subject to a withholding tax of 25% for amounts up to $15,000 and 30% for amounts over $15,000. This withholding tax may be higher or lower depending on your country of residence and any applicable tax treaties.

Investment Options

Both RRSPs and RSPs offer a wide range of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. These investment options allow individuals to tailor their portfolios to their risk tolerance and investment objectives.

It is important to note that RRSPs and RSPs can hold the same types of investments, but the specific investment options available may vary depending on the financial institution or investment provider you choose. It is advisable to research and compare the investment options offered by different providers to ensure they align with your investment preferences.

Withdrawal Rules and Penalties

While both RRSPs and RSPs are designed to be long-term retirement savings vehicles, there are differences in the withdrawal rules and penalties associated with each.

RRSP withdrawals are subject to taxation at your marginal tax rate, as mentioned earlier. However, there are certain circumstances where you can withdraw funds from your RRSP without incurring a tax penalty, such as the Home Buyers' Plan (HBP) and the Lifelong Learning Plan (LLP). The HBP allows first-time homebuyers to withdraw up to $35,000 from their RRSPs to purchase a home, while the LLP allows individuals to withdraw funds for full-time education or training. These withdrawals must be repaid within a specified timeframe to avoid tax consequences.

RSP withdrawals, on the other hand, are generally subject to a withholding tax as mentioned earlier. However, there are no specific programs like the HBP or LLP associated with RSPs.

Impact on Government Benefits

Another important consideration when choosing between RRSPs and RSPs is the impact on government benefits. RRSP contributions do not affect eligibility for government benefits such as the Canada Child Benefit (CCB) or the Goods and Services Tax (GST) credit. This means that contributing to an RRSP will not reduce the amount of these benefits you receive.

RSP contributions, however, may impact your eligibility for certain government benefits. Since RSP contributions are tax-deductible, they can reduce your taxable income, potentially affecting the calculation of benefits that are income-based. It is important to consider the potential impact on government benefits before deciding between RRSPs and RSPs.

Conclusion

RRSPs and RSPs are both valuable retirement savings options that offer tax advantages and investment opportunities. Understanding the differences between the two, such as eligibility criteria, contribution limits, tax deductibility, withdrawal rules, and impact on government benefits, is crucial in making an informed decision.

Ultimately, the choice between RRSPs and RSPs depends on your residency status, financial goals, and individual circumstances. Consulting with a financial advisor or tax professional can provide personalized guidance to help you make the best choice for your retirement savings strategy.