There are numerous financial plans and structures created for different purposes, including those targeted for retired individuals. Among them, there is the Registered Retirement Savings Plan (RRSP) as well as the Registered Pension Plan (RPP). People often confuse the two items Here, we will discuss the differences between a pension and the RRSP.
Both items are classified as retirement savings plans, registered under the Canada Customs and Revenue Agency. The main difference between the two is the beneficiary – RRSPs are for individuals, while pensions are created by companies or organizations for their employees.
Registered pension plans, or pensions, are arranged by employers in order to provide retirement income for their retirees in periodic payments. Normally, a portion of an employee’s present income is arranged as a contribution for the pension plan. Employers may match that amount in full or in portion as well. Contributions are not taxable, but once you retire and receive your pension, that will be the time to declare it as income in your tax return.
On the other hand, RRSPs are geared for individuals and can be considered as an investment account. An account is opened with a particular financial institution wherein contributions are made. These contributions are actually deductible and can be declared in a tax return.
An RRSP account can be managed by the beneficiary or a financial institution. Investments can be made with it in the form of mutual funds, stocks, bonds and many more. As long as the funds are within the RRSP, any income derived from its investments are tax exempt. It is worth noting, however, that withdrawals (which can be made even before retirement) are taxable and must be declared.
|Purpose||Retirement savings plan||Retirement savings plan|
|Registration||Canada Customs and Revenue Agency||Canada Customs and Revenue Agency|
|Target Beneficiary||Employees within a company or organization||Any individual taxpayer|
|Managing Body||Beneficiary’s employers||The beneficiary or the managing financial institution|
|Tax Declaration||Declared on line 130 upon retirement and receipt of retirement income||Deductions can be declared on line 208|
|Taxable||Upon retirement and receipt of income||For withdrawals|
|Limitations||Dependent on the nature of the pension – defined contribution plans have the same max annual contributions as RRSPs||Contributions can only be made up to 71 years of age; maximum annual limit dependent on maximum for taxpayers as well as percentage of income from the previous year|
|Withdrawals||Dependent if the employee is fully vested; may be liable to liabilities or penalties when withdrawn prematurely||Withdrawals are taxable and can be made before retirement; declared on line 129 of the tax return|