401k vs RRSP Retirement Accounts: What Are They and What’s the Difference?

401k vs RRSP—what’s the difference? Our experts explain everything you need to know, including contribution limits, fees, matching, and more.
401k vs. RRSP
Estimated read time
18
minutes
Category
Benefits
Written by
Melissa Hamer-Jackson
Published on
June 14, 2024

Are you a U.S. employer that wants to offer retirement perks to employees in Canada? Or an American who wants to open a Canadian retirement account? Here’s what you need to know about a 401k vs RRSP.

Content at a glance

    What’s the difference between a 401k vs RRSP? If you’re not sure, you’re not alone! Most Americans and U.S. employers are familiar with 401k retirement accounts. However, many have questions about the 401k equivalent in Canada—the RRSP. What’s the difference between a 401k in the U.S. and an RRSP in Canada? We’re here to explain.

    In this article, we’ll discuss each type of retirement account in detail and examine the key similarities and differences. Plus, our employment, legal, and tax experts will answer the most common questions about RRSPs and how they compare to 401ks. For example, what are the contribution limits for a 401k vs RRSP? How much does it cost to set up and maintain an RRSP? And how does RRSP employer matching work compared to a 401k?

    Whether you’re an employee or an employer, keep reading to discover everything you need to know about RRSP vs 401k retirement accounts.

    401k vs RRSP - An Overview

    The table below provides an overview of the key similarities and differences between a 401k vs RRSP.

    401k RRSP
    Account Purpose Retirement savings. Retirement savings.
    Account Types
    • Traditional
    • Roth
    • Safe Harbor
    • SIMPLE, etc.
    • Individual
    • Group
    • Spousal
    • Pooled
    Account Set Up Set up by employer.

    Individual RRSP - set up by individual.

    Group RRSP - set up by employer.

    Contributions Employees can make contributions through payroll deductions.

    Individual - account holders must make contributions through a financial institution.

    Group - employee contributions made through automatic payroll deductions.

    Employer Matching Often offered by employers (but not mandatory).

    Individual - employer matching not offered.

    Group - may be offered (but not mandatory).

    Contribution Limits

    Employee contribution limit is a fixed amount set by the IRS.

    Total annual contribution limit, including employee and employer contributions, equals 100% of employee’s compensation OR the annual limit established by the IRS, whichever is less. Individuals who are 50+ may also deposit an additional “catch-up contribution.”

    Unused contribution room doesn’t carry forward.

    Total contribution limit (including employer contributions) equals 18% of the individual’s earned income in the previous year OR the limit set by the CRA, whichever is less, PLUS unused contribution room from previous years.
    Tax Benefits and Rules

    Traditional 401k - contributions made using pre-tax dollars, reducing taxable income for immediate tax savings. Withdrawals are taxed.

    Roth 401k - contributions do not reduce taxable income. Withdrawals (including investment earnings) are tax-free.

    Limited to options offered by the employer.

    Common investment options include:
    • Stocks
    • Bonds
    • Mutual funds, etc.

    Individual - investment options not limited.

    Group - employer may limit investment options.

    Common investment options include:
    • Stocks
    • Bonds
    • Mutual funds, etc.
    • ETFs
    • GICs, etc.
    Withdraw Rules and Requirements

    Cannot withdraw funds (without penalty) until the age of 59½ (unless exceptions apply).

    Mandatory withdrawals at age 73 (i.e., “required minimum distributions”).

    Individuals can withdraw funds anytime (although withdrawals are subject to tax implications).

    Mandatory withdrawal required at age 71. Options for withdrawing include - lump sum withdrawal, purchase of an annuity, or conversion into a RRIF.

    Fees
    • Administrative Fees.
    • Investment Fees
    • Fees for additional services.

    Employers may cover some costs.

    • Administrative Fees.
    • Investment Fees
    • Fees for additional services.

    Individual RRSP - account holder responsible for all costs.

    Group RRSP - employers may cover some costs.

    What is a 401k?

    A 401k is a U.S. employer-sponsored savings account designed to help employees plan for retirement.

    “Employer-sponsored” means that an employer must set up a 401k. Employees cannot set up their own 401k unless they meet certain conditions (e.g., they are self-employed).

    INTERESTING TO NOTE: A 401k is a “defined contribution plan” - an alternative to a traditional pension plan. Over the years, defined contribution plans, like 401ks, have become more common than pensions. Like an RRSP, these plans shift the risk and responsibility of saving for retirement from the employer to the employee.

    There are several different types of 401k accounts, each with its own rules and tax advantages (for employees and employers), including:

    • Traditional 401k
    • Roth 401k
    • Safe Harbor 401k
    • SIMPLE 401k

    In this article, we’ll focus on the two most common types of 401k accounts - traditional and Roth.

    What’s the difference between a traditional 401k vs Roth 401k?

    The biggest difference between a traditional and Roth 401k is how they’re taxed

    Employee contributions to a traditional 401k reduce taxable income. Contributions are made directly from an employee’s paycheck using pre-tax dollars (i.e., money that hasn't had income tax deducted). This immediately results in lower taxable income and less income tax paid. In addition, employees don’t pay tax on investment earnings - initially. However, withdrawals are taxed.

    On the other hand, employee contributions to a Roth 401k do not reduce taxable income because contributions are made using after-tax dollars. However, withdrawals (including investment earnings) are tax-free. That said, there may be tax consequences if an employee withdraws money from their Roth 401k before age 59 ½.

    Please Note: To avoid penalties, seek advice from a qualified financial advisor before withdrawing from a 401k account.

    These tax structures mean a traditional 401k is similar to an RRSP in Canada, while a Roth 401k is more like a TFSA (Tax-Free Savings Account).

    In our discussion, we’ll primarily focus on the traditional 401k and how it compares to an RRSP. But before we look at the similarities and differences between a 401k vs RRSP, let’s explore how a 401k works.

    How does a 401k work?

    Wondering about 401k contribution rules and limits, employer matching, withdrawal requirements, etc.? Our employment and tax experts explain everything you need to know below.

    401k Contributions

    Employee contributions to a 401k are deposited automatically from each paycheck. With a traditional 401k, these contributions lower taxable income and potentially the employee’s tax burden. 

    For example, if an employee’s annual salary is $60,000 and they contribute $6,000 to a traditional 401k, their taxable income is reduced to $54,000.

    Employer Contribution Matching

    Often, employers will match employee contributions (to a maximum). 

    Different employers use different contribution formulas. However, a typical employer match contribution is $0.50 for every $1, up to a certain percentage of the employee's compensation (e.g., up to 6% of their salary).

    401k Contribution Limits and Rules

    A 401k has two annual contribution limits—one for employee contributions and another for combined employee and employer contributions. These limits are adjusted periodically to reflect inflation. To avoid penalties, employees should not exceed these contribution limits.

    How much can you contribute to a 401k? Below are the annual employee contribution limits, total employee and employer contribution limits, and catch-up contribution limits for employees 50+.

    Year Employee Contribution Limit Total Employee and Employer Contribution Limit* Catch-Up Contribution Amount (age 50+)
    2024 $23,000 $69,000 $7,500
    2023 $22,500 $66,000 $7,500
    2022 $20,500 $61,000 $6,500
    2021 $19,500 $58,000 $6,500
    2020 $19,500 $57,000 $6,500
    2019 $19,000 $56,000 $6,000

    *The total employee and employer contribution limit equals 100% of the employee’s compensation OR the annual limit specified above (established by the IRS), whichever is less. For example, if an employee made $60,000 in 2023, their total employee and employer contribution limit for 2024 would be $60,000 rather than $69,000.

    An employee can have multiple 401k accounts. However, employee contributions to all accounts cannot exceed the limit for one account. For instance, if an employee has a traditional 401k and a Roth 401k, they can only contribute a combined maximum of $23,000 in 2024 ($30,500 if they are 50+).

    That said, if an employee has multiple 401k accounts with unrelated employers, each employer can contribute up to a maximum of $46,000 in 2024 (i.e., $69,000 total contribution limit less $23,000 employee contribution limit).

    Unlike with an RRSP, unused contribution room in a 401k cannot be carried over to following years. When comparing a 401k vs RRSP, the ability to roll over unused contribution room is a significant advantage of an RRSP.

    How does a 401k grow?

    The money in a 401k can be invested in various investment vehicles, including stocks, bonds, mutual funds, etc. An employee can choose how they’d like to invest their money. However, they may be limited to a list of options specified by their employer.

    Most importantly, investment earnings (including gains, interest, and dividends) accumulate tax-free in a traditional 401k until funds are withdrawn.

    401k Withdrawals

    Employees can start withdrawing funds from their 401k without facing penalties when they are 59½ (or meet other criteria). Any withdrawals made before this time are subject to income tax PLUS a 10% early withdrawal penalty (on the amount withdrawn).

    Required Minimum Distributions

    Retired individuals must start withdrawing funds from their traditional 401k at age 73. These required withdrawals are referred to as “required minimum distributions” (RMDs). 

    The annual required withdrawal amount is based on the account balance and life expectancy.

    401k Fees

    There are several fees and costs associated with a 401k. Some of these costs may be covered by the employer, while others are the responsibility of the employee. Some of the most common 401k fees include the following.

    • Administration fees - administration fees cover the cost of maintaining the 401k plan. These costs may be deducted from investment returns, charged against the plan's assets, or paid directly by the employer.
    • Investment fees - investment fees are charged for investment management and other investment-related services. These fees are typically a percentage of the invested assets and are deducted directly from each employee's investment returns.
    • Additional service fees - additional service fees may apply if an employee chooses to take advantage of optional services and features. For example, additional service fees may be charged if an employee takes a loan from their 401k. These costs are covered by the employee.

    Now that you know more about 401k accounts and how they work, let’s review RRSPs - so we can compare a 401k vs RRSP.

    What is an RRSP?

    An RRSP is a retirement savings account in Canada

    Unlike a 401k (which must be opened by an employer), anyone who earns income and files a tax return in Canada can open an RRSP. This includes both employees and self-employed individuals. 

    What does RRSP stand for? RRSP stands for Registered Retirement Savings Plan.

    RRSP and 401k accounts have many features in common. Therefore, RRSPs are often viewed as the 401k equivalent in Canada.

    Like 401ks, there are several types of RRSPs, including:

    • Individual
    • Group
    • Spousal
    • Pooled

    In this article, we’ll focus on individual and group RRSPs.

    What is a group RRSP?

    A group RRSP is a retirement savings account in Canada that is employer-sponsored - and very similar to a 401k. Like a 401k, an employer must set up a group RRSP.

    A group RRSP account is funded by an employee through payroll deductions, which may be matched by the employer. Like individual RRSP contributions, group RRSP contributions offer tax savings by deferring income tax.

    Like other employee benefits in Canada, including PTO, maternity and paternity leave, and employee health benefits, offering access to a group RRSP provides many advantages for employers. Learn more about these advantages below.

    What’s the difference between a group RRSP vs individual RRSP?

    There are several differences between a group RRSP vs individual RRSP. Some of the most significant differences include the following.

    1. A group RRSP is set up by an employer, while an individual RRSP is set up by a single person.
    2. Employers may match employee contributions to a group RRSP but will not match contributions to an individual RRSP.
    3. Contributions to a group RRSP are deducted immediately from payroll calculations. Therefore, employees experience tax savings right away. In comparison, the tax benefits of individual RRSP contributions are not realized until an employee files their income tax return for the year.

    To better understand the similarities and differences between a 401k vs RRSP, let’s first examine how an RRSP works.

    How does an RRSP work?

    Below, we’ll explain how an RRSP works in Canada, including RRSP contribution rules and limits, employer matching, withdrawal rules, RRSP fees, and more.

    RRSP Contributions

    Contributions to an individual RRSP are tax-deductible. That is, the amount an individual contributes to their RRSP can be deducted from their taxable income when they file their taxes. This may reduce the income tax they pay or maximize their tax return.

    It’s important to note that contributions to an individual RRSP must be made before a specific deadline to qualify as a deduction.

    Contributions to a group RRSP also help minimize income tax. However, with a group RRSP, contributions are taken directly from an employee's paycheck before tax is applied. Therefore, the tax savings are immediate.

    RRSP Employer Contribution Matching

    Unlike a 401k, employers will not match contributions to an individual RRSP. However, employers may contribute to a group RRSP (although they aren’t required to).

    How does employee matching work for an RRSP vs 401k? Similar to a 401k, employers will match a percentage of the employee’s contributions. However, with an RRSP in Canada, it is common for an employer to match dollar for dollar to a maximum of 3-5% of the employee’s salary.

    RRSP Contribution Limits

    401k vs RRSP contribution limits work differently. Similar to a 401k, an RRSP has a contribution limit that should not be exceeded in order to avoid penalties. However, unlike a 401k, the RRSP contribution limit is based on an employee’s income rather than a fixed amount (up to a maximum limit set by the CRA).

    In the table below, you’ll find the maximum RRSP contribution limits for 2019-2024.

    Year Annual Maximum RRSP Contribution Limit*
    2024 $31,560
    2023 $30,780
    2022 $29,210
    2021 $27,830
    2020 $27,230
    2019 $26,500

    *The total RRSP contribution limit for a given year equals any unused RRSP contribution room from preceding years PLUS 18% of an employee’s income in the previous year OR the maximum limit specified by the CRA, whichever is less.

    A person may have multiple RRSP accounts, including both a group and individual RRSP. However, like a 401k, they can only contribute up to the maximum allowable amount for one account.

    For example, if a person has an individual RRSP and a group RRSP, they can only contribute a total of 18% of their earned income in the previous year or $31,560 (figure for 2024), whichever is less, plus any unused contribution room from previous years. 

    Individuals are responsible for tracking their contribution room and ensuring they don’t exceed their limit.

    Both individual and employer contributions count toward the maximum RRSP contribution limit.

    Unlike with a 401k, RRSP contribution room carries forward. Therefore, if an individual doesn’t contribute the maximum amount, their leftover contribution room rolls over to future years. This is a significant advantage of RRSPs when comparing 401k vs RRSP accounts.

    Where to Find Your RRSP Contribution Limit

    Not sure what your RRSP contribution limit is for a given year? Simply log into your CRA My Account or check your notice of assessment for an accurate figure. 

    Keep in mind that while the CRA provides your limit for a given year, you must track your contributions throughout the year to ensure you don’t exceed your limit.

    RRSP Growth

    Similar to a 401k, an RRSP can hold various investment vehicles. Common options include mutual funds, stocks, bonds, exchange-traded funds (ETFs), and Guaranteed Investment Certificates (GICs). The account can also be used to hold cash savings.

    Any income earned from investments in an RRSP is tax-exempt until it is withdrawn.

    RRSP Withdrawals 

    Unlike a 401k, account holders can withdraw money from their RRSP anytime without facing penalties. However, withdrawn funds are considered taxable income and are subject to withholding taxes.

    Mandatory Withdrawals

    On the last day of the calendar year in which an RRSP account holder turns 71, they must withdraw their RRSP funds. To do so, they have several options:

    • Withdraw the amount in a lump sum
    • Purchase an annuity
    • Roll the fund over into a Registered Retirement Income Fund (RRIF) 

    It is important to note that each option has different tax implications.

    RRSP Fees and Costs

    RRSP fees and costs can vary greatly, depending on where the account is opened and how funds are invested.

    Typically, an RRSP doesn’t have setup or monthly fees. However, individuals and employers should be aware of other costs, including the following.

    • Management and administrative fees - some RRSP providers may charge administrative fees for services such as account statements, investment changes, tax receipts, etc. With a group RRSP, these fees are typically much lower and may be covered by the employer.
    • Investment costs - if an individual invests the money in their RRSP, they may pay management, trading, and/or sales fees, depending on what they invest in. For example, a management expense ratio (MER) is charged when investing in mutual funds or ETFs.
    • Additional costs -  any additional services will also come at an extra cost. For example, transferring money from one RRSP to another, transferring an RRSP to another financial institution, closing an RRSP, etc.

    6 Key Similarities Between a 401k vs RRSP

    So, is an RRSP the same as a 401k? While these two retirement accounts aren’t identical, they are similar in many ways. Here are the fundamental similarities between a 401k and RRSP.

    1. Purpose of the Account 
      Both 401ks and RRSPs are retirement accounts intended to help individuals plan and save for retirement.
    2. Tax Savings and Rules
      Contributions to both a 401k and RRSP offer tax savings in the form of deferred taxes.

      With a traditional 401k and a group RRSP, tax savings are immediate. On the other hand, contributions to an individual RRSP are tax-deductible, meaning they may be used to reduce taxable income at the end of the tax year. This results in less tax paid or a larger tax return - but not until taxes are filed.

      When a withdrawal is made from a traditional 401k, individual RRSP, or group RRSP, the funds are taxed.
    3. 401k vs RRSP Contribution Limits
      Both retirement accounts have annual contribution limits, although these limits (and how they’re calculated) differ.
    4. Employer Contributions
      Although not required to do so, an employer may match contributions to a 401k or group RRSP. Matching may range from $0.50 per dollar to dollar for dollar (up to a maximum).

      Keep in mind that employers will not match contributions to an individual RRSP.
    5. Investment Options and Tax-Deferred Earnings
      An individual can invest the funds in a 401k or RRSP using various investment vehicles, including stocks, bonds, mutual funds, etc. Best of all, investment earnings aren’t taxed until money is withdrawn.
    6. Mandatory Withdrawals
      Both retirement accounts require the account holder to make mandatory withdrawals at a certain age. However, these required withdrawals are handled differently with a 401k vs RRSP (more on this below).

    7 Critical Differences Between a 401k vs RRSP

    401k and RRSP accounts also differ in several important ways. Here are the most significant differences between an RRSP vs 401k.

    1. 401k vs RRSP Account Setup
      In the U.S., employees cannot set up a 401k (unless they're self-employed or own a business). Rather, employers must set up 401k accounts.

      In Canada, an individual can set up an individual RRSP, but an employer must set up a group RRSP.
    2. Contributions
      Employees can make contributions to a 401k and a group RRSP through payroll deductions.

      In contrast, account holders must make contributions to their individual RRSP in cash through a financial institution.
    3. Employer Contributions
      In the U.S., 401k employer matching is common.

      Employer contributions are less likely in Canada - unless through a group RRSP.
    4. Contribution Limits and Rules
      A 401k has two contribution limits - an employee contribution limit (a fixed amount set by the IRS) and a total employee and employer contribution limit. Individuals 50+ can also make additional catch-up contributions.

      Employees cannot carry forward unused 401k contribution room.

      On the other hand, an RRSP has a single contribution limit (based on the individual's earned income in the previous year). This limit remains the same whether or not the individual receives employer contributions.

      Individuals may carry forward unused RRSP contribution room to subsequent years.
    5. Investment Options
      401k and group RRSP accounts may have limited investment options, depending on what an employer offers.

      However, an individual RRSP provides access to all investment vehicles, including the option to invest in foreign securities and assets.
    6. Withdrawal Rules and Penalties
      Employees cannot withdraw 401k funds without facing early withdrawal penalties until age 59½ (unless exceptions apply).

      An individual can withdraw RRSP funds at any time. However, these withdrawals are subject to tax implications.
    7. Required Withdrawals
      With a 401k, employees must begin making mandatory withdrawals (called “required minimum distributions”) at age 73.

      In comparison, an individual must withdraw their RRSP funds in the year they turn 71. However, several different withdrawal options are available (each with different tax implications).

    What happens to my 401k if I move to Canada?

    Do you have a 401k in the U.S. but want to move to Canada to work? If so, you have several options when it comes to your retirement account, each with different conditions and tax implications.

    1. Leave your 401k in the U.S. to grow on a tax-deferred basis (until you wish to withdraw the funds or until you turn 73).
    2. Transfer your 401k to an RRSP.
    3. Roll over your 401k into an IRA (Individual Retirement Account), then transfer it to an RRSP.

    Understanding the various requirements and tax implications of each option is important before deciding which is right for you.

    401k vs RRSP Retirement Account Benefits

    401k and RRSP retirement accounts have numerous advantages for both employees and employers. Let’s compare some of the most significant benefits offered.

    401k vs RRSP Benefits for Employees

    Employee Benefit Traditional 401k Group RRSP Individual RRSP
    Tax Savings
    Tax-Deferred Investment Growth
    Employee Matching Common Sometimes Never
    Automatic Contributions from Paychecks

    401k vs RRSP Benefits for Employers

    Employee Benefit Traditional 401k Group RRSP Individual RRSP
    Attract and Retain Top Talent n/a
    Improved Morale, Company Culture, and Productivity n/a
    Tax-Deductible Employer Contributions n/a
    Easier to Administer than Traditional Pension Plans n/a
    Option to Outsource Administrative Details n/a

    Want to offer your employees in Canada access to a Group RRSP? It’s easy with the help of an EOR like Thirdsail! Contact the Thirdsail team to learn how we can help!

    Should your business offer a group RRSP in Canada? 

    Offering your employees in Canada access to a group RRSP can provide numerous benefits for your business, including: 

    • The ability to attract top talent in Canada.
    • Improved employee satisfaction, resulting in better employee retention.
    • Increased productivity.
    • Tax benefits from tax-deductible employer contributions.
    • The ability to offer retirement benefits and security without setting up and managing a traditional pension plan.

      PRO TIP:
      With the help of an EOR in Canada, like Thirdsail, you can outsource the administrative details of setting up and managing a group RRSP. As a result, you’ll experience the benefits above without the administrative burden.

    When deciding whether to offer a group RRSP to employees in Canada, it’s also important to consider costs. For example, the cost of matching employee contributions, associated administrative fees, etc. As well, it’s essential to ensure that the group RRSP will comply with all relevant regulations and standards. Again, working with a reputable and experienced EOR in Canada can help you ensure compliance.

    Offer a Group RRSP in Canada with the Help of Thirdsail

    Want to take advantage of the benefits a group RRSP can offer your business, including the ability to help attract and retain top talent in Canada? Thirdsail can help.

    Partnering with an EOR like Thridsail is the fastest and easiest way for U.S. businesses to hire employees in Canada and offer employee benefits like group RRSP retirement accounts. In addition to handling the initial details, our team will take care of payroll deductions for employee contributions and any employer matching you wish to offer. 

    Ready to get started? Contact Thirdsail today!

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