The main difference between a RPP and a RRSP is that an RPP is set up by your employer to provide you with retirement income while an RRSP is an individual retirement savings plan that you must manage and contribute to.
With a Registered Pension Plan (RPP), your employer has more control over what financial institution manages your retirement portfolio.
In contrast, you can open a Registered Retirement Savings Plan (RRSP) in any financial institution you choose and control what investments assets are in your account.
What is a RPP?
A Registered Pension Plan (RPP), as the name suggests, is a pension plan that is registered with the Canada Revenue Agency (CRA).
Generally, an employer sets up a Registered Pension Plan to contribute savings towards your retirement.
When your employer sets up a Registered Pension Plan (RPP), it can operate as either a defined benefit pension plan or a defined contribution plan.
With a defined benefit pension plan, your retirement income is calculated based on a predetermined formula, typically using factors such as your years of service and your highest average salary.
This means that your retirement income is essentially guaranteed, regardless of how your retirement investments perform. If the plan’s investments underperform, your employer will be responsible for covering any funding shortfalls.
On the other hand, with a defined contribution plan, your retirement income will depend on the performance of your retirement investment portfolio. You and/or your employer contribute to the plan, and the money is invested in various assets such as stocks, bonds, and mutual funds.
The final amount you receive in retirement will depend on the performance of these investments, as well as the fees and expenses associated with managing the plan.
This means that there is more risk and uncertainty associated with defined contribution plans, but they also offer more flexibility and control over your retirement savings.
It’s important to carefully consider the differences between defined benefit and defined contribution plans when deciding which type of RPP to choose, as they can have significant implications for your retirement income and financial security.
While a RPP is an employer-sponsored plan, you can also contribute to your RPP.
Some employers match employees’ contributions, providing retirement contributions as an employment benefit.
Pros of a RPP
- Your employer can match your contributions and also contribute to an RPP.
- Your retirement savings grow and are tax-deferred.
Cons of a RPP
- You cannot choose the financial institution that manages your retirement savings.
- The money in an RPP is locked-in until retirement.
- Your employer’s contributions may need to be vested in order to receive them, meaning you may lose them if you leave your employer.
What is a RRSP?
A Registered Retirement Savings Plan is a plan you can contribute to for retirement purposes.
The RRSP is registered with the CRA and allows you to save and grow your money tax-free.
However, when you withdraw from your RRSP, you must pay taxes to the CRA.
Through an RRSP, you can make contributions until the end of the year you turn 71.
When you save and invest through your RRSP, you can claim tax deductions for your contributions.
There are different variations of RRSPs.
The Group RRSP allows employees to contribute to a group plan for cost-effective administrative and management costs.
You can also contribute to a Spousal RRSP if your spouse or common-law partner has contribution room, and you get to claim the tax deductions.
Pros of a RRSP
- Your retirement savings grow and are tax-deferred.
- You can contribute to a spousal RRSP.
- You can borrow from your RRSP to buy your first home through the Home Buyer’s Plan (HBP).
- You can claim an RRSP deduction when filing your income tax and benefits return.
Cons of a RRSP
- Employers are not mandated to contribute to your RRSP.
- Contributions are with after-tax dollars.
Considerations When Planning for Retirement
When saving for retirement, you should consider the pros and cons of the retirement plans you choose to contribute to as well as significant differences between them.
Differences Between a RPP and RRSP
- Your employer sets up a RPP and decides which financial institution manages your retirement savings. You can open an RRSP with a provider of your choice and have a say in which investment assets are in your portfolio.
- Your contributions in a RPP are usually locked-in until retirement, while you can access the funds in your RRSP subject to taxes on withdrawal.
- Contributions to the RPP are usually directly from payroll using pre-tax dollars, but you use after-tax income when contributing to your RRSP.
Similarities Between a RPP and RRSP
- You can use a RPP and RRSP to save and invest for retirement.
- The RPP and RRSP are registered with the Canada Revenue Agency.
- Both accounts are tax-deferred.
- When you withdraw from your RPP and RRSP, you pay taxes on the withdrawal amount.
Tax Implications of RPPs and RRSPs
Contributions to RPPs and RRSPs are tax-deductible, meaning that they can be used to reduce your taxable income.
However, there are limits to how much you can contribute to each type of plan. For example, the maximum RRSP contribution limit is 18% of your previous year’s earned income, up to a maximum of $30,780.
There is no such limit for RPPs, but your employer may have their own contribution limit.
Withdrawals from RPPs and RRSPs are taxed differently.
RPP withdrawals are typically taxed as income, meaning that you’ll pay tax on the entire amount you withdraw at your marginal tax rate.
In contrast, RRSP withdrawals are taxed as income as well, but they are subject to a withholding tax, which is a percentage of the withdrawal amount that is withheld and remitted to the government on your behalf.
The withholding tax rates range from 10% to 30%, depending on the amount withdrawn. The actual amount of tax owed will depend on your marginal tax rate.
There are some tax benefits that are unique to RPPs.
For example, contributions made by your employer to your RPP are not included in your taxable income, which can help to reduce your overall tax burden.
Additionally, if you have a defined benefit RPP, you may be eligible for a pension adjustment, which is a deduction from your RRSP contribution room that reflects the value of the pension benefits you earned through your RPP.
This can help to ensure that you don’t over-contribute to your RRSP and incur penalties.
Factors to Consider When Choosing Between an RPP and RRSP
Evaluate your current financial situation: Before deciding on whether to contribute to an RPP or an RRSP, it is important to assess your current financial situation. Consider your income level, expenses, and any outstanding debts or financial obligations you may have.
This can help you determine how much you can afford to contribute to either plan.
Consider your retirement goals: Think about when you want to retire and how much income you will need in retirement.
This can help you decide how much you should contribute to your retirement plan and which plan may be more suitable for your retirement goals.
Evaluate your employer’s retirement benefits: If you have access to an RPP through your employer, evaluate the plan’s benefits and compare them to the benefits of an RRSP.
Consider factors such as contribution matching, investment options, and fees.
Consider your tax bracket: Your tax bracket can have an impact on which plan is more suitable for you.
If you are in a higher tax bracket, contributing to an RRSP may provide more tax benefits, as contributions are tax-deductible and withdrawals are taxed at your marginal tax rate, which may be lower in retirement.
On the other hand, if you are in a lower tax bracket, contributing to an RPP may be more beneficial, as contributions are made with pre-tax dollars, reducing your taxable income.
Consider your investment preferences: Consider your investment knowledge and preferences when deciding between an RPP and an RRSP.
RPPs are typically managed by professional fund managers, whereas RRSPs give you more control over your investments.
If you prefer to have more control over your investments, an RRSP may be more suitable for you.
Consider the level of risk you are comfortable with: RPPs typically offer a more conservative investment approach, whereas RRSPs may offer a wider range of investment options, including riskier investments such as stocks.
Consider your risk tolerance when deciding between the two plans.
Frequently Asked Questions
- Does RPP count toward RRSP?
Yes, your contribution and employer’s contribution to your RPP count towards your RRSP contribution room.
- Can I withdraw from RPP?
Generally, you cannot withdraw from a Registered Pension Plan as your funds are locked-in until retirement. If the employer’s contributions are vested when you leave, you can transfer your contribution and your employer’s contribution to another RPP, RRSP, a Specified Pension Plan (SPP), or a pooled Registered Pension Plan.
If you are ready to start receiving money from your RPP, you can convert your locked-in contributions to a Life Income Fund (LIF) or unlocked funds to a Registered Retirement Income Fund (RRIF).
- Is RPP tax-deductible in Canada?
Most RPP contributions are made directly from payroll using pre-tax income and are tax-deferred. After-tax contributions to your Registered Pension Plan (RPP) are tax-deductible. If you contribute after-tax income to your RPP, you can claim tax deductions to reduce your taxes in the applicable tax year.