Registered Retirement Savings Plans (RRSPs) and Registered Pension Plans (RPPs) are retirement savings tools that help you plan for your financial future.
Knowing the similarities and differences between the two is critical to understanding their tax treatment.
Registered Retirement Savings Plans
An RRSP is an individual retirement savings plan that can be established by any Canadian at the financial institution of their choice.
Contributions made to your RRSP reduce your tax owing and therefore your tax payable in the year that you contribute. You will receive two tax receipts for each taxation year.
The first tax receipt will be for contributions made between March and December of the tax year for which you are filing. The second will be for contributions made within the first 60 days of the subsequent calendar year. Note that this subsequent year contribution must be reported in the March-December tax year that you are reporting.
This is due to the unique tax structure of RRSPs. The amounts on these two receipts will be added together and deducted on line 208 of your tax return.
When a withdrawal is made from an RRSP, the amount withdrawn will be included on line 129 of the applicable income tax return.
Registered Pension Plans
An RPP cannot be opened by an individual. They are a pension fund that many employees receive as part of their employment contract and are organized by an employer to provide you with a pension when you retire. Employee contributions for an RPP are withheld from each pay cheque and, in some cases, matched by the employer.
As with an RRSP, the money that you contribute to your RPP will be deducted from your employment income, delaying taxation until future withdrawals.
Unlike an RRSP, however, the amount that you have contributed will be included on your T4 in box 20 or on a T4A in box 032 and be deducted on line 207; you will not be sent an additional tax receipt from the financial institution which manages the RPP.
Withdrawals from this plan will be included on line 130 of your tax return in the year of withdrawal.
Do RPP contributions affect my RRSP contribution limit?
For many Canadians, RRSPs are the primary form of retirement savings. Each year, you are given a contribution limit based on your previous year’s income. If you do not use your entire contribution limit in any given year, the unused amount is carried forward indefinitely.
If you contribute to an RPP, the pension adjustment included on your T4 slip in box 52 or on your T4A in box 034, which is provided by your employer for each tax year, will reduce your RRSP contribution limit in the following year.
Whether you decide to use an RPP, RRSP or a combination of both is dependent on your specific situation and future savings goals.
To further discuss the savings options available to you and which would best suit your situation, contact us today.
