Registered Retirement Savings Plan vs. Registered Pension Plan: An Overview

Registered Retirement Savings Plans (RRSP) and Registered Pension Plans (RPP) are both retirement savings plans that are registered with the Canada Revenue Agency (CRA). RRSPs are individual retirement plans, while RPPs are plans established by companies to provide pensions to their employees. They are comparable to defined-contribution savings plans and defined-benefit pension plans in the United States.

Key Takeaways

  • Registered Retirement Savings Plans and Registered Pension Plans are Canadian retirement vehicles.
  • They are similar to defined-contribution savings plans and defined-benefit pension plans in the United States.
  • Money is generally deposited pre-tax, and investment income grows tax-free, but tax is paid upon distribution.

Registered Retirement Savings Plan

A registered retirement savings plan is a retirement savings and investment account for employees and self-employed people in Canada. Contributions are made pretax, but distributions are taxed at the marginal rate. If someone is taxed at a rate of 30% and he or she contributes $1,000 to an RRSP, the entire sum is applied to the account. In contrast, if the individual took those funds in wages, he or she would pay $300 in income taxes.

Individuals are allowed to contribute up to 18% of their earned income annually to their RRSP, up to an annually adjusted cap ($26,230 for tax year 2018). For example, if you earn $50,000, 18% of your annual income is $9,000, and you can contribute all of it to your RRSP. If you earn $200,000 per year, 18% of your taxable income is $36,000, but $26,230 remains the maximum amount you can contribute.

You can find your maximum contribution limit on your latest notice of assessment on line A of the RRSP Deduction Limit Statement. However, if your taxable income has changed from the previous tax year, your contribution limit has also changed.

If you contribute more than the annual allowed maximum amount, the extra contribution is considered an excess. Excess contributions may be taxed at a rate of 1% per month.

If you have not made maximum contributions in previous years, however, you may add the value of contributions that were allowed but not made to your current year's allowance. As a result, your maximum contribution limit may be higher than $26,230.

For example, if you made $50,000 in 2013 and 2014 and you didn't make any contributions in 2013, you could contribute $9,000 for each year. In that case, your maximum annual contribution for 2014 would be $18,000.

Registered Pension Plan

Contributions to both RRSPs and registered pension plans are not taxed for Canadian residents (those living abroad may face local taxes). Individuals and their employers may both contribute to RPPs, and neither's contributions are taxed.

Money earned within both RRSPs and RPPs is not subject to income or capital gains taxes. However, withdrawals from both plans are taxed as income.

Maximum contributions on RPPs vary based on which type of RPP is being used. There are two types of RPPs: defined benefit RPPs and money purchase RPPs. In defined benefit plans, the pension amount is known and does not change, but the contribution amount varies. These plans do not have a yearly maximum contribution limit.

Money purchase or defined contribution plans do not have a set or predictable pension amount, but employees know how much they are expected to contribute. Maximum annual contributions to money purchase RPPs are the same as they are for RRSPs.