Registered Retirement Savings Plan (RRSP) is a retirement savings and investing vehicle for employees and the self-employed in Canada. RRSP have many features in common with 401(k) plans in the United States, but also have some differences.

Similarities

• • Both plans are official investment types created by their respective governments, and conferring tax advantages designed to encourage you to save for retirement.

• • Both plans have annual contribution limits designed to prevent you from contributing all of your income into the account.

• • Both plans money put in these accounts are considered pre-tax contributions, which means that you can claim an income tax deduction for contributions made to the account during the year.

• • Both plans enable tax-deferred investment growth. That is, any returns generated in the account are not taxed in the year returns, for example no taxation for capital gains, dividends, interest etc. Rather, they are taxed later upon withdrawal. Therefore, the "deferred" helps compound growth work to your advantage.

• • Both plans generally permit you to invest in a variety of investment products, such as mutual funds, bonds and stocks, etc.

• • Both plans have ages beyond which withdrawals or conversion to an account type requiring withdrawals is mandatory. (Required Minimum Distribution rule in the U.S., and RRIF accounts in Canada.)

Differences

• • 401(k) is offered only in conjunction with an employer. 401(k) contributions can only be made through your employer via payroll deduction. Whereas an RRSP can be purchased with any financial institution. In Canada it is possible to have an Individual RRSP, as well as a Group RRSP from an employer, and payroll deductions are just one way to put money in.

• • The contribution amount limit is different for each plan. The annual contribution limit to 401(k) for 2019 is $19,000 regardless of employee income. Employee age 50 and older can add an extra $6,000 per year in “catch-up” contributions, bringing the contribution maximum to $25,000. In Canada, an employee’s annual contribution RRSP limit for 2019 is 18% of earned income you reported on your tax return in the previous year, up to up to a maximum of $26,500. RRSP has no such “catch-up” provision.

• • 401(k) contribution allowances have a use it or lose it for the year policy, but the RRSP contribution allowances cumulatively carry forward. That is, unused RRSP contribution limits can be carried forward indefinitely.

• • 401(k) has an early withdrawal penalty. If you withdraw money from your 401(k) account before age 59 1/2, you will need to pay a 10% early withdrawal penalty, in addition to income tax on the distribution. There are some exceptions where you can withdraw 401(k) money early. In Canada, you can take money out of your RRSP before you retire, but you are immediately going to pay a withholding tax on the amount withdrawn. Under the federal Home Buyers' Plan, you can withdraw up to $25,000 from RRSP account without paying tax.

As you can see there are many similarities as well as differences in the American 401(k) plan compared to the Canadian Registered Retirement Savings Plan - ‘RRSP’.