I had a request recently from a blogger friend of mine – Paid Twice, who thought it would be a good idea to do a post on the common U.S. and Canadian investment accounts and try to find which ones are comparable. This post deals with the Canadian RRSP and the U.S. 401(k) plan – other accounts will be covered in future posts. I’m only going to do the more common accounts, since the more obscure types probably aren’t known very well on either side of the border.
Please note that this is just a general comparison – it’s not intended to be reference material for any of the accounts listed.
A big thanks to Madison from My Dollar Plan for helping out with this series.
Canadian retirement account
RRSP (Registered Retirement Savings Plan )
- Money in these accounts are considered pre-tax which means that you are taxed at marginal rates upon withdrawal. Basically you add any withdrawals to your income in the year you do a withdrawal.
- Grow tax free inside the account. No taxation for capital gains, dividends, interest etc.
- Both types have annual contribution limits.
- 401(k) is setup with your employer plan whereas an RRSP can be setup with any financial institution.
- 401(k) contributions can only be made through payroll deductions whereas RRSP contributions can be made through payroll deductions (commonly through employer-sponsored group RRSP plans) as well as cash (after tax) contributions which then generate a tax rebate.
- 401(k) has a 10% penalty (with some exceptions) for withdrawal before the age of 59.5 (why the .5?) – the RRSP has no withdrawal penalties. There are some exceptions where you can withdraw 401(k) money early.
- Contribution limit for an RRSP is set as a percentage of the previous years income (18% or a maximum of $20,000). the 401(k) annual limit is $15,500 for everyone regardless of how much money you earn. Americans older than 50 can contribute an extra $5,000 per year.
- In the RRSP – unused contribution limits can be carried forward indefinitely. 401(k) contribution amounts have to be used each year or they are lost.
These accounts are very similar in that the contributions are made pre-tax, no taxes are paid inside the account and withdrawals are taxed at the marginal income rates. The US 401(k) has more restrictions in terms of setting up an account as well as withdrawals. I personally like to have less restrictions on retirement accounts but in some cases the restrictions will prevent people from taking the money out for silly reasons.
Here is more info on RRSP contribution limits.