401k vs RRSP: Comparing US and Canadian Retirement Plans

Are you an American working in Canada, a Canadian working in America, or a dual citizen? You may have retirement savings plans from two different countries to choose from.

Or maybe you’re just interested in understanding how the American plan compares to its Canadian equivalent.

The Canadian equivalent of a 401k is called a Registered Retirement Savings Plan (RRSP). It isn’t talked about as often simply because the US has 9 times the population. But an RRSP has some great benefits, and in some cases may be better than a 401k.

Let’s quickly introduce each plan. Then we’ll compare the features of 401k vs RRSP accounts and comment on key similarities and differences.

What is a 401k?

A traditional 401k is a retirement savings plan offered by some US employers to their employees.

Employees and employers can make contributions to the account on a tax-deferred basis. Those contributions are invested in a set of options that the employer chooses to offer in the plan. Investment dividends and capital gains are not taxed. Then, after retirement, money can be withdrawn at ordinary income tax rates.

There is a second type of 401k called a Roth 401k. A Roth 401k works the same way as a traditional 401k, except that contributions are taxed upfront. Then capital gains, dividends, and withdrawals are after-tax dollars after that.

Employers can match 401k contributions, but cannot contribute to an after-tax Roth 401k. The matching contribution must be placed in a traditional tax-deferred 401k instead.

From this point forward, we will be referring to a traditional 401k, not Roth, since it is more similar to the Canadian RRSP.

What is an RRSP?

A Canadian Registered Retirement Savings Plan is a retirement savings plan available to all Canadian employees. Employers do not need to sponsor an RRSP for an employee to open an account. That makes it similar to a traditional IRA (Individual Retirement Account) in the United States.

However, a Group RRSP is an employer-sponsored version of the Canadian RRSP that’s similar to an American 401k.

An RRSP is taxed in the same way as a traditional 401k. Contributions are made on a tax-deferred basis, grow tax-free, and are taxed as ordinary income when the money is withdrawn.

Comparison of 401k vs RRSP

The following table compares important 401k and RRSP features.

	401k	RRSP
Country	United States	Canada
Annual Contribution Limit (2023)	$22,500 employee contributions limit. $7,500 extra employee catch-up contributions if age 50+. $66,000 combined employee + employer limit.	18% of earned income in the previous year, up to $30,780 max. Unused contributions from past years can be carried to future years, however, up to age 71.¹
Employer Contributions	Employer contributions do not count toward the employee limit.	Employer contributions count toward the $30,780 limit.
Withdrawal Rules	10% penalty for withdrawals before retirement age, defined as 59 ½, unless hardship withdrawal rules are met.² After age 59 ½, only income taxes apply.	Withdrawals can be made at any time with taxes, but no penalty. Unless they’re invested in a locked-in RRSP (aka LIRA). No taxes if used for Home Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP).³
Taxation	Tax-deferred until money is withdrawn, then taxed as ordinary income.	Tax-deferred until money is withdrawn, then taxed as ordinary income.
Required Distributions	RMDs (Required Minimum Distributions) begin on April 1 the year you turn 73, unless you are still working and don’t own 5% or more of the business sponsoring the 401k.⁴	Funds must be withdrawn or transferred to a RRIF (Registered Retirement Income Fund) by December 31 the year you turn 71.⁵An RRIF is an annuity provided by an insurance company.⁶
Who Can Participate	Employees of businesses that sponsor a 401k plan. Small business owners can open a Solo 401k.	Employees and self-employed people can open an RRSP themselves if their employer doesn’t sponsor one.
Investment Options	The employer controls investment options. Usually limited to specific mutual funds, but sometimes given a self-directed brokerage link for broader options. Options may also depend on the financial institution chosen.	Similar to 401k, except employees have more control of investment options when they open their own RRSP.
Creditor Protection	Protected from creditors under Employee Retirement Income Security Act (ERISA). Exceptions: not protected from an ex-spouse or the IRS.⁷	Protected from creditors under the federal Bankruptcy and Insolvency Act. The level of protection depends on the province. ⁸
Can you have both?	Yes. An American who is a Canadian resident can invest in a company 401k and a Canadian RRSP. RRSP tax benefits may be offset by US taxes, however. And 401k contributions cannot be made from excluded earned income.⁹	Yes. Canadians working in the US can invest in company 401k and a Canadian RRSP if they also have Canadian earned income.¹⁰
Can you transfer one to the other?	Yes. If you roll over a 401k to an IRA, you can then transfer the IRA to an RRSP.¹¹	No. If funds are withdrawn from RRSP, Canadian taxes are due.¹²
Are contributions deductible when living in the other country?	Yes, 401k contributions get a tax deduction if there’s still room toward the RRSP contribution limit and you meet US-Canada tax treaty rules.¹³	Yes, RRSP contributions get a tax deduction if the contribution is made by the employee to an employer-sponsored group RRSP plan and Canada-US tax treaty rules are met.¹³

Table 1 – Comparison between 401k and RRSP

Key similarities

The Canadian RRSP and American 401k are identical in the way they’re taxed. They can be invested in similar ways. And they have similar creditor protections, though an RRSP’s protection depends more on the province where you live.

Key differences

One of the main differences between RRSP and 401k is the contribution limits and rules.

A 401k has higher overall limits, but whether or not those limits are reached depends on how much an employer contributes. The RRSP contribution limit depends on how much the employee earns, and the employer can contribute toward that limit.

Also, an RRSP’s contributions can be carried forward to future years if not made in the current year. 401k contributions must be made in the current year.

An RRSP is more available. All Canadian workers can open an RRSP, while a 401k is only available if employer-sponsored.

Both plans require distributions to start in your early 70s. But distributions are made in a very different way. A 401k has an RMD schedule that must be followed. An RRSP withdrawal must either happen all at once or the RRSP account must be converted into an annuity that pays out according to its schedule.

Another main difference is that a 401k cannot be withdrawn until age 59 ½ without penalty. An RRSP doesn’t have an early withdrawal penalty. Note that both plans have exceptions to these rules for financial hardship, education, or homeownership.

Summary

The 401k vs RRSP debate may never reach a clear conclusion. Each plan has its benefits and advantages over the other. And both are a great way to save for retirement.

This article provided details about each plan that will help you make the most of a 401k and RRSP, whether both are available to you or not.

If you have both options and can only choose one, it might come down to how you want to take income in retirement. If you want your income to be set up as annuity payments, then the RRSP is designed to pay you that way. But if you want to leave more to your heirs and charities, and want to continue investing your retirement savings rather than converting to a pension plan, then a 401k may be the better option.

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