U.S. vs. Canadian Retirement Plans: What’s the Equivalent to 401k or Roth IRA?

We Canadians share a lot in common with our neighbours to the south. We shop at many of the same stores, watch the same TV programs, we even follow the same sports teams sometimes. When it comes to personal finance, the programs we use to save for retirement also share many similarities.

What can be confusing, however, is that we have different names for everything, making the terminology hard to figure out. For example, Canadians have RRSPs, Americans have something called a Traditional IRA. But they also have something called a Roth IRA, which looks more like our very own Tax Free Savings Account (TFSA).

To help sort it all out, I’ve compiled a list of the registered retirement plans from both countries and matched each one with its closest counterpart. In addition, I’ve provided a summary of the similarities and differences of each. Consider this a crash course in cross-border retirement plans. Are you ready? Let’s dive in.

RRSP vs. Traditional IRA

Canadians have been able to enjoy tax-sheltered growth in RRSPs since the government-sponsored account was created way back in 1957. RRSPs provide 2 key benefits for Canadian investors; a tax deduction on contributions made to the plan, and tax-sheltered growth until the funds are withdrawn, presumably at retirement. The annual contribution limit is 18% of employment income earned during the previous tax year, up to a maximum of $27,230 (2020).

For Americans, the Traditional IRA enables individuals to save for retirement in a tax-sheltered account, while benefiting from a tax deduction on the contributions. The maximum annual contribution limit of $6000 is lower than that of an RRSP, and there are penalties for withdrawing early. If you don’t maximize your annual contribution in a Traditional IRA, the room is lost, whereas, with an RRSP, you can carry forward any unused contribution room indefinitely. Some of these limitations of the Traditional IRA are made up for in the 401K plan.

A Note About Spousal RRSPs/IRAs

In both Canada and the US, one can open a spousal version of an RRSP/IRA. The idea is to be able to income split after retirement, by accumulating funds in the name of the lower-income earner. In both plans, the account is held in the name of one spouse, with the other acting as the contributor. One key difference with a Spousal IRA is that withdrawals are always considered to be income for the account holder, whereas with a Spousal RRSP, there is an attribution rule which can cause withdrawals to be taxed as income for the contributor in certain situations.

How They Are Similar

• Tax-sheltered accounts
• Contributions are tax-deductible
• Withdrawals are taxed as regular income

How They Are Different

• Annual contribution limits are different; traditional IRA max is $6,000, $7000 for those over age 50 (401K plans have higher contribution limits, see below)
• RRSPs allow for a lifetime overcontribution of $2000
• Home Buyers Plan and Lifelong Learning Plan allow for funds to be borrowed from an RRSP tax-free, to help pay for the purchase of a home and post-secondary education.
• As of December 2019, no maximum age for IRA contributions, RRSP is 71.

Group RRSPs vs. 401Ks

Group RRSP plans share many similarities with their US counterpart, the 401K, the first being that both are offered by employers, to employees. These are tax-sheltered accounts for which the contributions are tax-deductible. In many cases, the employer will provide a company match, to encourage participation in the plan.

The contribution limits of the plans differ. The annual 401K contribution limit is $19,000, much higher than the traditional IRA. With Group RRSPs, the plan holders’ contribution limit and their regular RRSP limit are one and the same. That is, 18% of the previous year’s employment income up to a maximum of $27,230 (2020). This limit must be shared between an individual’s personal and Group RRSP plan.

How They Are Similar

• Contributions are tax-deductible
• Tax-sheltered growth
• Withdrawals are taxed as regular income
• Both plans offer an employer match (in most cases)

How They Are Different

• Annual contribution limits 401K: $19,000, Group RRSP and personal RRSP contribution room is shared. limit
• Additional penalties for early withdrawal from a 401K
• 401K unused contribution room is lost, Group RRSP, it’s carried forward
• 401K contribution limit increases after age 50, to allow employees to “catch up”

TFSA vs. Roth IRA

For Canadians, TFSAs offer many of the same benefits that the Roth IRA does for Americans. Unlike RRSPs and Traditional IRAs, these plans accept deposits as after-tax income. In other words, contributions are not tax-deductible. That said, these are tax-sheltered accounts, so funds are allowed to grow tax-free as long as they are in their respective accounts.

Unused contribution room can be carried forward in a TFSA account but is lost under a Roth IRA. Another difference in regards to contributions – with a Roth IRA, the annual limit is shared with a Traditional IRA, meaning that an investor may need to choose which plan to make deposits to each year. The TFSA account is independent of other plans, like RRSPs. Generally speaking, TFSA accounts offer more flexibility when it comes to withdrawals. With a Roth IRA, you can be penalized for withdrawals if your plan is less than 5 years old, or you are under 59.5 years of age.

How They Are Similar

• Tax-sheltered account
• Contributions are not tax-deductible
• No tax on withdrawals (Roth IRA subject to limitations, however)
• Annual contribution limits are both $6000 (as of 2020)
• No age limit when one must stop making contributions

How They Are Different

• Unused contribution room is lost in a Roth IRA, can be carried forward in a TFSA
• Contribution limit of Roth IRA is shared with Traditional IRA
• Roth IRA has some withdrawal limitations not present in TFSA

Retirement in Canada vs. USA

It’s clear that Canadian retirement plans have a lot in common with their US equivalents. They also have their differences, which is why an RRSP is more than just a Canadian IRA, or 401K Canada, for that matter.

While it’s important to compare apples to apples, one of the advantages I see with Canadian retirement plans is having the ability to carry forward unused contribution room to future years. Also, being able to make withdrawals at any time without penalty is a great feature of TFSAs. Either way, whether you live in Canada or the US, make sure these tax-sheltered accounts are included in your plan for retirement.