What is a 401k Equivalent in Canada?

Canada does not offer a 401k, which is a retirement savings plan in the United States, however there are similar plans available for Canadians.

A 401k is a retirement savings plan that employers provide for employees in the US.

The 401k is a tax-advantaged retirement savings plan that allows you to defer tax on your income. 

The retirement savings plan derives its name from the Internal Revenue Service (IRS) tax code section 401(k).

If you opt to contribute to the 401k, your employer will automatically deduct your contributions from your pay and place them into their investment plan.

Some employers match employee contributions to a 401k.

The 401k has annual contribution limits for each year.

In 2022, the limit is $20,500, however for people 50 years of age and above, the contribution limit is $27,000 in 2022.

401k Equivalent in Canada

Canadians have a similar retirement savings plan to the 401k, called the Group Retirement Savings Plan (GRSP).

The Canadian government introduced Registered Retirement Savings Plans to encourage residents to save for retirement. 

You can have an employer or personal registered retirement savings plan.

The registered savings plan you open outside of an employer’s plan is an RRSP, whereas an employer RRSP is usually offered as a group RRSP or GRSP.

In a GRSP, employees can automatically contribute directly from their pay cheques and most employer-sponsored GRSPs offer employees a match on their contributions as a workplace benefit. 

Similar rules apply to retirement savings through both the Group Retirement Savings Plan (GRSP) and the Registered Retirement Savings Plan (RRSP).

You can leave your money in cash or invest in other financial assets through a designated stock exchange market when you contribute to an RRSP.

Examples of qualified investments in a Registered Retirement Savings Plan are stocks, mutual funds, Exchange-Traded Funds (ETFs), Guaranteed Investment Certificates (GICs), bonds, and Real Estate Investment Trusts (REITs).

Investing in non-qualified investments through your RRSP can lead to a fifty percent tax on your non-qualified investments plus additional tax on your investment income. 

Like the 401k, there is an annual contribution limit for an RRSP.

The annual RRSP limit is usually indexed for inflation.

The limit for 2022 is $29,210 and you can carry your unused contribution room forward to the following year. 

Your combined contributions to an employer Group Retirement Savings Plan and a personal Registered Retirement Savings Plan should not exceed your RRSP contribution room.

Similarities Between a 401k and an RRSP

Certain features make the 401k and RRSP similar.

• Employers offer the 401k and group RRSP to employees for retirement savings purposes. Employers and employees can contribute to 401k plans and group RRSPs.
• The contributions to employer-sponsored 401k plans and RRSPs are usually pre-tax dollars and provide tax breaks. Pre-tax contributions to the plans are tax-deductible.
• The 401k and RRSP have annual contribution limits adjusted annually for inflation.
• Employees can select the investment types in their 401k and group RRSP plans based on their risk profiles and investment objectives. 
• Contributions in the 401k and RRSP are tax-deferred and grow tax-free provided they remain in the plans. Money in both plans is not taxed until withdrawal in retirement or at any time. 
• If an employer-sponsored 401k plan allows, employees can borrow from the plan. The RRSP also allows borrowing for the Home Buyer’s Plan (HBP) and Lifelong Learning Plan (LLP).
• Excess contributions in both plans are subject to tax.

Differences Between a 401k and an RRSP

While similar, the 401k and the RRSP are different in a couple of ways.

• The 401k plan can either be a traditional 401k or a Roth 401k. While the traditional 401k is similar to the RRSP, the Roth 401k is more similar to the Canadian Tax-Free Savings Account (TFSA) where employees can invest after-tax dollars.
• Taking a loan from a traditional 401k can lead to interest payments, withdrawal penalties, and taxes. However, you can take an interest-free loan from an RRSP under the First-time Home Buyer’s Plan (HBP) and Lifelong Learning Plan (LLP).
• You must distribute your excess contribution in a 401k by April 15 of the following year. The excess amount and earnings from the excess contribution will be included in your gross income and taxed. For excess contribution in an RRSP over $2,000, the Canada Revenue Agency will apply a 1% tax for every month it remains in the RRSP.

Frequently Asked Questions