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RRSPs, also known as Registered Retirement Savings Plans, are set up by you. How and when you can access these plans are affected by this.
In general, though, RPPs and RRSPs are both good ideas. Retirement can be expensive, and having the savings available when you retire allows you to enjoy this time without the added stress of money. That said, which type of retirement plan you have will dictate how you access it and how it influences your financial situation and your financial security.
How Both RPPs and RRSPs Work
As we’ve mentioned, both RPPs and RRSPs focus on retirement savings. That said, RPPs are managed by your employer. They have a say in how these funds are managed and what type of portfolio they sit in. Depending on the type of RPP you have, both you and your employer make contributions to it until you retire or are no longer employed with the company. RRSPs, on the other hand, are managed by you, and you control the contribution amounts. You can also take the funds out before retirement, but you will have to pay a withholding tax.
RPPs
Just like RRSPs, RPPs are retirement savings that are registered with the Canada Revenue Agency (CRA). That said, there’s more than one type of RPP. When your employer chooses to set these up, they can choose between a defined benefit pension plan or a defined contribution plan. No matter which plan you have, though, you still make employee contributions and receive employer contributions.
A benefit pension plan is defined by your years of service and your highest average salary. Essentially, this type of pension plan offers guaranteed retirement funds and can still be kept once you’re no longer employed with the company. You should also receive annual statements regarding your pension.
A defined contribution plan is a bit more volatile. This type of pension is based on where your retirement funds are invested and what the return is on them. With this type of pension plan, there is risk involved, so there’s no guarantee on how much you’ll receive during retirement.
With that in mind, though, there are some benefits of RPPs compared to RRSPs, the first being that your employer also contributes to your retirement savings. Another bonus is that RPPs are tax-deferred, meaning you don’t pay tax on the money invested in the account. Unfortunately, though, there are also some drawbacks.
With RPPs, you don’t have a say in the financial institution the funds are invested like you would with an individual account. You’re also locked into the account. This means that you can’t access the funds before you retire. It’s also possible that you could lose any pension amounts when you leave your employer, but that’s not always the case. Many employers will just freeze the pension amounts where they are, and you can either move them or access them when you retire.
RRSPs
RRSP is a retirement account that you opened and registered with the CRA. It allows you to save for retirement while saving money tax-free. That said, as soon as funds are withdrawn from an RRSP, you do have to pay taxes on them, whether you wait until retirement age or not.
With an RRSP, you’re able to save for your retirement until you’re 71, then you have to start using the funds. That said, you don’t have to use all of it, and you have control over how much income gets invested and when you withdraw.
That said, an individual retirement savings plan isn’t the only type of RRSP there is. There are also group retirement savings plans and spousal RRSPs. Your employer opens group RRSPs since this is considered an employer-sponsored plan and often offers a discount on management fees. They also allow you to take funds directly from your paycheck and deposit them into your RRSP. Whether or not your employer contributes to these group plans is based on the employer. Some employers will just open the plan, while other employers match employee’s contributions. Employer’s contributions aren’t locked into this plan, and often, you can cash them out like traditional RRSPs.
Spousal RRSPs allow you to put some of your employment income into your spouse's RRSP up to an annual limit per year.
No matter what type of RRSP you choose to open, though, there are some benefits. The first is the fact that you can use your RRSP to purchase your first home or go back to school tax-free. As long as you follow the rules for the Home Buyers Program or the Lifelong Learning Program, then those funds will not be income taxed like regular RRSP withdrawals. RRSPs also allow you to save for retirement tax-free with the potential of a lower lifetime tax rate.
Just like with any type of investment, though, there are some drawbacks.
- Withdrawals are classified as taxable income..
- There is not much freedom in how you can withdrawals
- You only have so much contribution room per year
How to Invest in RRSPs
When you open an RRSP, you have a choice of different investment options. The most common way to do this is with mutual funds. Mutual funds allow you to invest your RRSP funds however you choose while still keeping track of your investment earnings. Even though mutual funds are an investment account, you can choose the portfolio for the mutual funds, having more control over your money while gaining tax benefits.
It’s important to keep in mind that, just because RRSPs are good options for retirement savings and to receive retirement income, they aren’t the only registered plan out there. Another option is LIFs. Lifetime Income Funds are a type of registered savings account designed to pay you an income from locked-in pension assets.
Contribution Limits of RPPs and RRSPs
In Canada, RPPs don’t have contribution limits. That said, how much you contribute annually to your RPP is based on your annual taxable income. With each pay cheque, you’ll put some money into your RPP, and so will your employer. This amount is predetermined, and you can’t change it. This is different from an RRSP.
With RRSPs, you can contribute as much as you like to the account as long as you don’t exceed your annual contribution limit. For 2023, the annual contribution limit was 18% of your annual taxable income, up to a yearly maximum contribution limit of $30,780.
Tax Differences Between RPPs and RRSPs
With both RPPs and RRSPs, your contributions are tax-deferred. You aren’t taxed on these funds until they’re withdrawn from the account. That said, you can only contribute the amount designated by your employer to your RPP pension benefits. This amount can be found on line 20700 of your tax return and is used for tax purposes under pension adjustments. RRSPs, however, you can control the amount that you contribute as long as it doesn’t go over your annual limit.
That said, any amounts that you do withdraw from your RRSP will be subject to a withholding tax. The amount that you pay in withholding tax will be determined based on the amount that you’re withdrawing. The amount for everywhere in Canada except Quebec is:
- 10% on amounts up to $5,000
- 20% on amounts over $5,000
- 30% on amounts over $15,000
The amount of withholding tax in Quebec is:
- 5% on amounts up to $5,000
- 10% on amounts over $5,000
- 15% on amounts over $15,000
Any amounts you contribute to your RRSP accounts, however, are tax deductible. Retirement contributions that you make before the end of the tax year count as tax deductions toward your pre-tax income and will reduce the amount of income tax you need to pay. Depending on your personal finance situation, you can make large contributions or periodic payments that are within your total contribution limit to reduce your tax liability.
Withdrawal Rules of RPPs and RRSPs
In Canada, whether or not you’re able to withdraw from your RPP is based on the type of plan you have and your reason for withdrawal. For most RPP plans, you can only withdraw from your RPP if you are no longer employed at your job. In this case, you can either withdraw the funds and put them in a different plan or leave them until you retire. If you choose to withdraw, some plans will allow a portion of your withdrawal to be taken out as cash instead of having to invest it all into a different retirement plan.
Withdrawing from an RRSP is different. Technically, you can withdraw funds from your RRSP whenever you want to, as long as it’s not locked in. With an RRSP, though, you will have to pay a withholding tax on anything you withdraw. The only exception to this rule is the Lifelong Learning Plan or the Home Buyers Program. Even when you retire, you’ll have to pay taxes on the funds you withdraw, whether that’s with an RPP or an RRSP.
Home Buyers Plan
The Home Buyers Plan is a program that allows you to withdraw up to $35,000 from your RRSP to buy or build a qualifying home for yourself or a specified disabled person. In order to qualify for this, though, you do have to be a first-time home buyer. When it comes to paying these funds back, however, you don’t have to do that right away. You have 15 years to return the funds, and it doesn’t start until the 2nd year after the year you withdraw the funds.
Lifelong Learning Plan
With the Lifelong Learning Plan, you can withdraw up to $10,000 in a calendar year from your RRSP to access full-time training or education for yourself, your spouse, or your common-law partner. You can do this every year until the fourth year after the year you made the first withdrawal. The total amount you’re able to withdraw under the Lifelong Learning Plan is $20,000.
When it comes to paying back the funds of the LLP, you have about 10 years to do so. Any funds that have yet to be paid back by the time that your LLP payments are due will be included in your income for that year.
Converting RPPs to RRSPs
Depending on the type of RPP you have, you could be eligible to transfer it to an RRSP. The most common instance in which this would happen is when you no longer work for the employer that supplies the RPP. When this happens, a lot of employers will give you the option to withdraw the RPP and put it into a locked RRSP. This allows you to earn on your pension while still keeping your money away. The alternative is to keep the RPP with your employer, but you won’t earn anything on it in this case.
Do RPPs Count Towards RRSPs?
One thing to consider when contributing to your RRSP is what the contribution limit is. Any funds you put into the RRSP will be using your contribution limit unless the funds you put in are from an RPP. RPP contributions don’t count towards your RRSP contribution limit.
Which is Better - RPPs or RRSPs?
Determining whether an RPP or RRSP is better really just depends on the type of RPP you have. RPPs that are defined benefit plans are ideal because the amount you receive is based on how long you’ve worked and what you earned. This means that the determined amount you receive will be a consistent amount you get from the time of retirement throughout your life. With RRSPs, the amount you receive monthly is based on the total amount that you have saved.
In an ideal situation, you would actually have both. An RPP provides a stable income as you enter retirement. Any RRSP funds that you have at this time are then used to supplement your income, so have an extra security blanket. It gives you access to more funds when you need them.
Final Thoughts
Whether you have RPPs or RRSPs, it’s important that you have some type of retirement plan in place. When it comes time to retire, having the funds to retire comfortably can make all the difference. It can also affect how and when you retire.
RPPs are there to give you a stable income when it comes time to retire. The income they provide will last you the rest of your life while enabling you to live comfortably. That said, the amount that you receive from an RPP is based on how much you earn and how many years you worked to earn that income. This is different from an RRSP, which holds funds that you invest into it. These funds, however, are also meant to supplement your income when it comes time for retirement. They’re great to have if you have an RPP but important if you don’t have one. If you’re ever unsure, though, the best option is to get professional advice from a financial advisor or financial planner.
