RSP Vs RRSP: What are the Key Differences?

What is the difference between an RSP vs an RRSP? The answer might not be as clear as you think. Both of these investment vehicles are designed to help Canadians save for their retirement, but there are some key differences between the two. In this article, we will take a closer look at the benefits and explain which one is right for you.

Let’s jump right in!

What is an RSP?

An RSP is a tax-free savings account that allows you to invest in stocks, bonds and other financial products. Unlike RRSPs, RSP contributions are not deductible from your income for tax purposes.

Instead of paying taxes on these earnings right away, they will only be taxed when withdrawals begin. This means that if you put money into an RSP, you will have to pay taxes on that money at a lower rate than if it was invested outside of an RSP.

Types of RSPs

There are two types of RSP in Canada: a registered education savings plan (RESP) and a registered disability savings plan (RDSP). An RESP is for the purpose of saving money to pay for future post-secondary education, while an RDSP is meant to help Canadians save money in case they become disabled.

Benefits of an RSP

An RSP can be a useful tool for Canadians who are looking to save money for their future. By taking advantage of tax-free compounding and other benefits, you will have more money available when it comes time to retire or pay your child’s education costs.

In addition, if you are over 70 years old and have an RSP in Canada that has not yet been cashed out, you will still be able to contribute up to $2700 per year to your account.

What is an RRSP?

RRSP stands for Registered Retirement Savings Plan that allows you to make tax-deductible contributions. This means that you can deduct the amount you contribute from your income for tax purposes, which will reduce the amount of taxes you pay on your earnings. For example: if you invest $5000 in an RRSP and earn a return of $2000 over one year, then those earnings are taxed at 15% instead of 20% because they were invested inside an RRSP.

Types of RRSPs

There are two types of RRSPs: a self-directed RRSP and a pooled RRSP. A self-directed RRSP is an account that you open with a financial institution, while a pooled RRSP is an account that is managed by a financial institution on behalf of multiple investors.

Benefits of an RRSP

An RRSP can be a great way for Canadians to save money and defer taxes. This is because you are able to deduct the amount you contribute from your income, which will reduce the amount of taxes you pay on those earnings. In addition, if you invest inside an RRSP instead of outside it, then all gains from those investments will be taxed at a lower rate when you withdraw them in retirement.

Difference Between RSP and RRSP

Both RSP and RRSP investments have their advantages and disadvantages, depending on your individual situation. The main difference between the two investment vehicles is that you can contribute to an RSP up until December 31st of the year in which you turn 71 years old whereas with an RRSP there is no age limit for contributions.

This means that RSPs are a great option for people who want to save for their retirement, but don’t have the time to contribute to an RRSP.

Another key difference between RSP and RRSP is that contributions to an RSP are not tax-deductible, whereas contributions to an RRSP are. This means that you will not get a tax break on your earnings if you put money into an RSP, but with an RRSP you can deduct the amount contributed from your income for tax purposes.

Which One Should I Choose?

There are a few things to consider before deciding which investment vehicle is right for you. First, ask yourself how much money you can afford to contribute each year.

If you are able to make tax-deductible contributions to an RRSP, then that might be the best option for you. However, if you don’t have the ability to make tax-deductible contributions, then an RSP savings account might be a better choice.

Another thing to consider is how long you plan on investing. If you are only planning on investing for a few years, then an RRSP might be the better option because of the tax break you get on your earnings. However, if you are investing for the long term, then an RSP might be a better option because you won’t have to pay taxes on your earnings right away.

RSP Vs RRSP: The Final Verdict

The bottom line is that there is no correct answer when it comes to deciding between an RSP and RRSP. The best thing to do is speak with a financial advisor to figure out which investment vehicle is right for you.