What is a 'Registered Retirement Savings Plan (RRSP)'

A Registered Retirement Savings Plan (RRSP) is a retirement savings and investing vehicle for employees and the self-employed in Canada. Pre-tax money is placed into a RRSP and grows tax free until withdrawal, at which time it is taxed at the marginal rate. Registered Retirement Savings Plans have many features in common with 401(k) plans in the United States, but also some key differences.

Breaking Down 'Registered Retirement Savings Plan (RRSP)'

Registered Retirement Savings Plans were created in 1957 as part of the Canadian Income Tax Act. They are registered with the Canadian government and overseen by the Canada Revenue Agency (CRA), which sets rules governing annual contribution limits, contribution timing and what assets are allowed. RRSP information may be found here.

RRSPs have two main tax advantages: Contributors may deduct contributions against their income. For example, if a contributor's tax rate is 40%, every $100 he or she invests in an RRSP will save that person $40 in taxes, up to his or her contribution limit. And the growth of RRSP investments is tax sheltered. Unlike with non-RRSP investments, returns are exempt from any capital-gains tax, dividend tax or income tax. This means that investments under RRSPs compound at a pretax rate.

In effect, RRSP contributors delay the payment of taxes until retirement, when their marginal tax rate will be lower than during their working years. The Government of Canada has provided this tax deferral to Canadians to encourage saving for retirement, which will help the population rely less on the Canadian Pension Plan to fund retirement.

There are a number of RRSP types, but generally, they are set up by one or two associated people (usually individuals or spouses).

  • An Individual RRSP it set up by a single person who is both the account holder and the contributor.
  • A Spousal RRSP provides benefits for a single spouse and also a tax benefit for both spouses. A high-earner (spousal contributor) may contribute to a Spousal RRSP in their spouse's name (the account holder). Since retirement income is divided evenly each spouse can benefit from a lower marginal tax rate.
  • A Group RRSP is set up by an employer for employees and is funded with payroll deductions, much like a 401(k) plan in the U.S. It is administered by an investment manager and affords contributors the advantage of immediate tax savings.
  • A Pooled RRSP, created in 2011, is an option created for small business employees and employers, as well as the self-employed.

Registered Retirement Savings Plan: Approved Assets

Several types of investment and investment accounts are permitted in RRSPs. They include:

  • Mutual funds
  • Exchange-traded funds
  • Equities
  • Bonds
  • Savings accounts
  • Mortgage loans
  • Income trusts
  • Guaranteed investment certificates
  • Foreign currency
  • Labour-sponsored funds

Registered Retirement Savings Plan: Contribution & Withdrawal

The RRSP contribution limit for 2018 is 18% of the earned income an individual has reported on their 2017 tax return, up to a maximum of $26,230. In 2019, that figure rises to $26,500. It is possible to contribute more but additional sum over $2,000 will be hit with penalties.

A RRSP account holder may withdraw money or investments at any age. Any sum is included as taxable income in the year of the withdrawal, unless the money is used to buy or build a home or for education (with some conditions).

In the year a RRSP holder turns 71, the RRSP balance must be liquidated or shifted to a Registered Retirement Income Fund (RRIF) or to an annuity.

Registered Retirement Savings Plan: 401(k) Differences

  • U.S. RRSPs may be set up via a financial institution; 401(k)s are set up by employers.
  • RRSP contribution limits may be carried forward.
  • Contribution limits for RRSPs are more liberal (based on a percentage of previous year's income; 401(k) limit is fixed to a specific dollar amount.
  • RRSP contributions may come from payroll deductions or cash contributions (which may lead to a tax rebate); 401(k)s are funded with payroll deductions.
  • 401(k)s have early-withdrawal penalties (though there are exceptions); RRSPs do not.
  1. Self-Directed RRSP

    A type of RRSP (Registered Retirement Savings Plan) whose owner ...
  2. Lifelong Learning Plan

    A provision applicable to the Canadian Registered Retirement ...
  3. Form 8891

    An IRS form that must be completed by any U.S. citizen or resident ...
  4. Home Buyers' Plan - HBP

    A program in Canada that allows RRSP holders to withdraw up to ...
  5. Registered Retirement Income Fund ...

    A retirement fund similar to an annuity contract that pays out ...
  6. Income Spreading

    A tax reduction strategy that is typically used by people with ...
Related Articles
  1. Retirement

    Registered Retirement Savings Plans (RRSP)

    Learn how the Canadian government makes saving for your post-work years easy. We take you from your first contribution to your first withdrawal.
  2. Personal Finance

    Canada: Maxing Out Your RRSP

    Attention, Canadians: Increasing your RRSP savings will provide tax benefits—and peace of mind.
  3. Financial Advisor

    Retiring in Canada: TFSA or RRSP?

    Canadians now have two options for retirement savings. Find out how to figure out which one's best for you.
  4. Financial Advisor

    Canadians: The 5 Fastest Ways To Save For A Down Payment

    Some methods of saving for a down payment are faster than others. Here are five tried and true ways to get into a house faster.
  1. Is a Registered Retirement Savings Plan (RRSP) taxable in the U.S.?

    Learn how the IRS treats Canadian Registered Retirement Savings Plans that are held by U.S. citizens or residents, and discover ... Read Answer >>
  2. Should a Canadian citizen who lives and works in the U.S. continue to contribute ...

    No, a U.S. resident should not contribute to a RRSP account. RRSP contribution rules allow you to contribute a certain percentage ... Read Answer >>
  3. What are the penalties for early withdrawal from a Registered Retirement Savings ...

    Learn about the three major penalties associated with making an early withdraw from your Registered Retirement Savings Plan ... Read Answer >>
  4. What should you consider before taking a loan on your Registered Retirement Savings ...

    Learn about the primary factors you should consider before deciding to take out a loan from your Registered Retirement Savings ... Read Answer >>
  5. What are the differences between a Registered Retirement Savings Plan (RRSP) and ...

    Learn about the key differences between RRSPs and TFSAs, including taxation, minimum and maximum age, allowed contribution ... Read Answer >>
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center