Difference Between RSP and RRSP

RSP vs RRSP

In Canada, like other countries, there are many saving plans intended for retirement. Retirement Savings Plan (RSP) and Registered Retirement Savings Plan (RRSP) are two of the popular saving accounts that are very popular among the citizens to save for their future as these have obvious tax benefits. The annual contribution to an RSP is tax free which means that yearly income tax can be reduced by opening an RSP. The money grows earning interest and the tax is deferred until distribution which makes it similar to the IRA in US. RRSP is similar to RSP and is a savings plan with special tax benefits.

RSP

The maximum annual pension that a Canadian can expect from the government stands at just $11000, which means a person cannot bank upon his pension and must save for his future on his own. This purpose is beautifully served by RSP which an individual can open and his contributions to it are tax free. A vehicle for retirement savings, RSP is available through banks, trust companies and other financial institutions. RSP also helps people to reduce their annual income tax which makes it more attractive. Withdrawal of money from RSP before retirement attracts strict tax penalties, but you can use the money if you want.

RRSP

RRSP is very similar to RSP and is an instrument for saving for retirement. Being tax free, all contributions subject to the maximum limit an individual is entitled to, are exempt from income tax which makes people contribute more and more to their RRSP. The account grows at a pre-tax rate with no income tax payable. It is deferred until retirement. In this aspect, it is much like an IRA in U.S. Though one has to pay income tax from the distribution he receives after retirement, there is a reduction in the rate as he is in the senior bracket then which is a saving in itself. Introduced in 1957, the main intention of RRSP is to encourage an individual to save for his own future. There are different types of RRSP, such as individual, spousal and also group RRSP. The maximum contribution limit to a RRSP in 2010 is $22000. Withdrawals are subject to income tax, but for certain cases such as buying a home or for education, there is no income tax levied. RRSP must be cashed out of before a person turns 71.

Difference between RSP and RRSP

Despite the fact that both RSP and RRSP are vehicles for retirement savings, there are differences between the two. One is obviously the registration aspect. While the RRSP is registered, RSP may or may not be registered. An RSP that is not registered is not entitled to government benefits like a registered RSP. Being registered, RRSP is safer than a RSP.

RRSP is linked with all your retirement plans including pension, insurance and other plans. This is not the case with RSP which only covers retirement plans.