CPP V/S RRSP: THE DIFFERENCES AND SIMILARITIES YOU MUST KNOW.

Most Canadian workers look forward to the day of retirement when after years of toil and service, it is finally time to put the guard down. Everyone wants their post-retirement life to be a haven, a utopia without financial hardships, mental strain, or emotional strain. To achieve such a feat, retirement planning becomes imperative.

Needless to say, retirement planning is not overnight magic. It takes a lot more effort, time, and contemplation to ace that ideal retirement scheme that will yield the maximum benefits later in life. Moreover, the crux remains that it is never too late to start planning for retirement, but the sooner you start, the better it is. Even if you are in your mid-twenties or early forties, the best time to lay out a retirement plan is now.

In this article, we will meticulously analyze two of the leading retirement income sources in Canada – the CPP, and RRSP, and the differences between the two. So, without further ado, let’s start!

WHAT ARE CPP AND RRSP?

Canada Pension Plan

The CPP is one of Canada’s main pillars of retirement income. During your employment years, you have to contribute a percentage of your income, and after your retirement, you receive a monthly pension. The CPP amount you are eligible for relies on the number and magnitude of payments paid in the plan and its duration. The earliest age to withdraw CPP money is 60, whereas, the standard age is 65. Moreover, you can choose to delay the benefits of CPP benefits until the age of 70 for increased payments. The average monthly CPP amount that Canadian citizens received in 2022 was CAD 727.61, whereas the maximum monthly CPP is CAD 1253.99. It is essential to remember that your wife and children might also be eligible for CPP benefits after your passing.

Registered Retirement Savings Plan

The Canadian government designed RRSP or the Registered Retirement Savings Plan to hold the citizens’ retirement savings. The money contributed to the RRSP account during your employment years continues to grow tax-free until when you retire and start making a withdrawal. The amount of money you can put in the RRSP account depends on your income for the previous year, and unused contributions transferred from previous years. In addition, it is essential to remember that the yearly RRSP payment limit in 2022 is CAD 29210. The best part about RRSP is that you can deduct the contributions from your taxable income, thereby lowering your overall tax burden. Likewise, it is possible to hold an assortment of investments in RRSP, including cash (savings account), stocks, GICs, mutual funds, ETFs, bonds, and even precious metals.

Now that we know about the basics of CPP and RRSP, let us note the essential differences between the two.

TOP FIVE DIFFERENCES BETWEEN CPP AND RRSP

The primary difference between CPP and RRSP is that both the employer and the employee are mandated to make CPP contributions promptly. The mandatory contributions are a stipulated portion of your pre-tax pay that you can find on every paycheque. In contrast, an RRSP is a voluntary retirement. You can contribute a maximum to the RRSP account each year based on your income, and the contributions are tax deductible.

The CPP provides a source of income for Canadian citizens after they retire. The best part is that CPP payments continue until you pass away. On the other hand, under RRSP, you will be required to take payments from the plan after a particular age, and the payments continue until the plan is exhausted.

Now, let us gauge the differences between CPP and RRSP in a more concise fashion – 

1. Starting Age – The starting bracket to take out CPP payments is 60 – 70. On the other hand, you can withdraw the RRSP amount at any age; however, the upper limit for withdrawal is 71 years.
2. Source of Contributions – For CPP, the contributions happen through mandatory automatic deductions from your paycheque. On the flip side, the RRSP contributions are voluntary, and you decide the amount and source.
3. Payment Amount – The CPP withdrawal amount is based on your contributions while working. On the other hand, the government mandates you to take out a minimum amount from the RRSP account; however, you can take out more if you like, but not less than the set standard.
4. Taxability – Both CPP and RRSP are taxable payments.
5. When do the Payments Stop – The CPP amount you receive stops when you pass away. However, a percentage of the payment can go to a surviving spouse. However, the RRSP payments stop when you run out of funds or when you pass away. If you pass away, the plan can transfer to your spouse, and they continue to receive the money. 

Now that we know the differences between CPP and RRSP in vivid detail, it is also good to glance through their similarities.

THE THREE SIMILARITIES BETWEEN CPP AND RRSP 

• CPP and RRSP are both tailored for people in the Canadian workforce and hence are not universal. 

• The amount you can expect to receive after your retirement from either of the plans depends to a certain extent on the number and magnitude of your past contributions while you were working.

• CPP and RRSP both intend to offer income for retired people who are no longer working.

CPP V/S RRSP: WHICH IS THE RIGHT PENSION PLAN FOR YOU 

Truth be told, there is no one-size-fits-all regarding the ideal retirement plan. However, some experts opine that the optimal retirement plan combines Canada’s seven retirement income sources. However, every Canadian citizen is unlikely to manage such gargantuan contributions to seven different accounts. However, if you are a high-earner, you can maxi your RRSP and then go for others. Likewise, it is a good idea to back CPP with other plans that suit your budget. So, there we have it, a crisp overview of the differences between RRPS and CPP.