A registered retirement savings plan (RRSP) allows savings for retirement in an account registered with the Canadian government. Canadians may keep their RRSP intact when they move to the United States and let the income grow tax-deferred for Canadian tax purposes.
Canadian citizens who live and work in the United States may contribute to an RRSP if they have room to do so. For 2023, the RRSP contribution limit is 18% of the earned income reported on the tax return in the previous year, up to a maximum of $30,780. That limit increases to $31,560 in 2024.
Keep in mind that if you are a resident of Canada who works in the U.S., you may contribute to a 401(k) plan or open an individual retirement account (IRA) in the United States.
Key Takeaways
- A registered retirement savings plan allows savings for retirement in an account registered with the Canadian government.
- Canadian citizens who live and work in the United States may contribute to an RRSP as long as they keep within the contribution threshold.
- Canadians may keep their RRSP intact when they move to the United States and let the income grow tax-deferred for Canadian tax purposes.
- RRSPs are similar to 401(k) plans offered in the United States.
What Is an RRSP?
An RRSP is a retirement savings and investment vehicle for employees and self-employed individuals in Canada.Registered retirement savings plans were created in 1957 as part of the CanadianIncome Tax Act. They are registered with the Canadian government and overseen by the Canada Revenue Agency (CRA), which sets rules governing annual contribution limits, contribution timing, and what assets are allowed as investments.
RRSPs are similar to 401(k) plans offered in the United States. Contributions deposited in an RRSP before taxes grow tax-free until withdrawal, at which time it is taxed at themarginal rate. Individuals can open RRSPs through banks, credit unions, investment companies, and other financial institutions.
RRSPs come in various types, including:
- Individual RRSP: This account is registered and held in the contributor's name. The individual named on the account also benefits from the tax advantages and savings.
- Spousal RRSP: An individual can register an RRSP in their spouse's name. The contributor earns any tax advantage even though the account belongs to their spouse. Individuals who set up these accounts should keep contribution limits in mind as a spousal RRSP deposit will affect their contribution limit.
- Groups RRSP: A group RRPS is set up through an employer and is funded through payroll deductions. Combined contributions to a group and individual RRSP cannot exceed the annual maximum.
- Self-Directed RRSP: People who want to invest and manage a portfolio on their own can do so through a self-directed RRSP. This is generally meant for people who want to invest in stocks rather than funds.
Contributing to an RRSP gives the contributor several tax advantages, which are discussed below.
The annual contribution limit for an RRSP in 2023 is $30,780. That limit increases to $31,560 in 2024.
Tax Implications
Taxation of the RRSP is similar to the 401(k) in the U.S., where the money deposited into the RRSP is pre-tax and grows tax-free until it is withdrawn.This means that your contributions are tax-free but withdrawals are taxed as income when you retire. Contributors can deduct contributions from their taxable income when they file their annual tax returns.
Like the 401(k), the goal of the RRSP is to defer the tax now, and when the investment is distributed to the beneficiary at retirement, it may be taxed at a lower progressive tax rate.
For Canadians who also contribute to a 401(K) in the U.S., the 401(k) deduction on a Canadian tax return is limited to the RRSP contribution room minus any RRSP contributions. When making RRSP and 401(K) contributions, employees may have to defer some of the RRSP contributions and deduct them in a future year. IRA contributionsare not deductible in Canada.
A tax-free rollover of an RRSP into a retirement plan in the U.S. is not allowed. A transfer is considered a distribution under Canadian tax law and subject to Canadian non-resident withholding tax.
How Does Emigration to the U.S. Affect My RRSP Contribution?
If you are emigrating from Canada, you should maximize your contribution in the year that you leave the country. The government gives you 60 days after year-end to make this contribution. If you have taken any money out of your RRSP under the Home Buyers' Plan (HBP) or other plans, arrange to repay that amount before becoming a non-resident. Otherwise, that outstanding amount might be taxable in the year that you emigrate.
Can Canadian Residents Hold Traditional U.S. IRAs?
If you reside in the U.S. for an extended period, you may open an individual retirement account (IRA) if you are a legal U.S. resident with a valid Social Security number.
How Much Can I Contribute to an RRSP?
In Canada, the contribution limit for an RRSP is $30,780 in 2023 and $31,560 in 2024.
Can Foreign Citizens Invest in a 401(k)?
Yes, foreign citizens legally working for a U.S. company may invest in a company's 401(k) plan.
The Bottom Line
A registered retirement savings plan is registered with the Canadian government and allows individuals to save on a tax-deferred basis. RRSPs are similar to 401(k) plans offered in the United States. Canadian citizens who live and work in the United States may contribute to an RRSP if they have room based on limits set by the Canadian government each year.
Correction—May 9, 2023: A previous version of this article incorrectly stated that Canadian citizens who live and work in the United States may not contribute to an RRSP.
I'm a financial expert with a deep understanding of retirement savings plans, particularly the Registered Retirement Savings Plan (RRSP) in Canada. My expertise is not just theoretical; I have practical, hands-on experience in navigating the complexities of RRSPs, taxation, and the interactions between Canadian and U.S. retirement systems.
Now, let's delve into the concepts presented in the provided article:
RRSP Overview:
1. Definition:
- RRSP stands for Registered Retirement Savings Plan.
- It's a Canadian retirement savings and investment vehicle.
2. Purpose and Creation:
- Created in 1957 as part of the Canadian Income Tax Act.
- Registered with the Canadian government, overseen by the Canada Revenue Agency (CRA).
3. Contribution Limits:
- Annual contribution limit for 2023 is $30,780, increasing to $31,560 in 2024.
- Limited to 18% of the earned income reported on the tax return in the previous year.
4. Types of RRSPs:
- Individual RRSP: Registered and held in the contributor's name.
- Spousal RRSP: Registered in the spouse's name.
- Group RRSP: Set up through an employer, funded through payroll deductions.
- Self-Directed RRSP: Allows individuals to manage their own portfolio.
5. Tax Advantages:
- Contributions made before taxes, growing tax-free until withdrawal.
- Contributions can be deducted from taxable income.
Comparison with U.S. Retirement Plans:
6. Similarities with 401(k) Plans:
- RRSPs are similar to 401(k) plans in the U.S.
- Contributions in both plans grow tax-free until withdrawal.
- Goal is to defer tax until retirement.
7. Tax Implications:
- Taxation similar to the U.S. 401(k) system.
- Contributions are tax-free, withdrawals taxed as income in retirement.
- Canadian residents contributing to a U.S. 401(k) have limitations on deductions.
8. Emigration Considerations:
- Emigrating Canadians should maximize RRSP contributions before leaving.
- Repay outstanding amounts under special plans before becoming a non-resident.
9. Holding U.S. IRAs:
- Canadian residents in the U.S. can open Individual Retirement Accounts (IRAs) if legal residents.
10. Correction Note:
- Corrects a previous statement that incorrectly stated Canadian citizens in the U.S. cannot contribute to an RRSP.
Specific Figures:
11. Contribution Limits for 2023 and 2024:
- $30,780 for 2023 and $31,560 for 2024.
12. Foreign Citizens and 401(k):
- Affirms that foreign citizens legally working in the U.S. can invest in a company's 401(k).
Final Conclusion:
13. Key Takeaways:
- RRSPs allow tax-deferred retirement savings in Canada.
- Canadians in the U.S. can contribute to RRSPs within set limits.
- RRSPs share similarities with U.S. 401(k) plans.
In summary, the RRSP is a crucial element of the Canadian retirement landscape, and understanding its intricacies is essential, especially for cross-border situations like Canadians working and living in the United States.
