What’s the Difference Between an American 401(k) and a Canadian RRSP? (Updated 2021) (2024)

As an employer, you know the importance of offering valuable benefits to your employees. A pension plan can help you attract top talent by increasing total compensation and giving employees retirement security. This can help you gain a competitive advantage and increase employee loyalty and retention.

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If you’re an employer in the US who is planning to expand into Canada or hire remote Canadian employees, you may want to offer your new Canadian workers a 401(k), especially if you offer this benefit to your American employees. What is a 401(k) in Canada? The Canadian equivalent of 401(k) is the Registered Retirement Savings Plan (RRSP). Here’s what you should know about the similarities and differences between the two.

The Canadian RRSP and the US 401(k) are both retirement plans. They give employees in Canada and the United States a tax-deferred way to invest and grow their retirement funds. Employees can choose a plan that enables them to invest in a diversified mix of investments, such as mutual funds, stocks, and GICs. Both plans have annual contribution limits.

While you can say that the 401(k) is the US equivalent to RRSP and vice versa, these plans are not identical.

Here’s how they differ:

• 1. While an employee would be taxed a steep 10% for early withdrawals in the US, employees in Canada do not face early withdrawal penalties on a Canadian RRSP account. However, they will be taxed on their withdrawals.

• 2. Unused RRSP contribution limits can be carried forward to the next year whereas a 401(k) plan has a use-it-or-lose-it policy.

• 3. The contribution amount limit is different for each plan. In Canada, the RRSP contribution limit is 18% of your earned income from the previous year. There is a maximum of $27,830 for the 2021 taxation year and $29,210 for the 2022 taxation year, not including RRSP contribution limits that are carried over from previous years. The annual contribution limit in 2021 for an American 401(k) plan is $19,500 for everyone regardless of income.

• 4. After the age of 50, American employees receive an additional $6,000 of contribution room, bringing the 2021 contribution maximum to $25,500 for those over 50. On the other hand, Canada’s RRSP does not allow employees to “catch up” with higher contribution levels after the age of 50.

• 5. Americans cannot set up their own 401(k) accounts; they must be managed by an employer, whereas employees in Canada can and often do set up their own RRSPs. However, it is not mandatory for employers to match their contributions if employees choose to set up their own plans.

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).

Setting up an RRSP for Canadian employees is not mandatory nor is matching contributions if an employee chooses to set up his/her own RRSP. However, it’s a valuable benefit to offer in order to attract and retain top talent in the country.

The process of setting up an RRSP matching employee program is easier than implementing a 401(k) program, but you will first need to have the various Canadian government accounts in place to process payroll deductions and remittances. This means you’ll need to register a business in Canada, apply for the various government accounts, and then set up the benefits plan you want to offer your Canadian workforce. This can be an onerous and time-consuming process. Fortunately, you can skip these steps by partnering with a Canadian employer of record (EOR) like The Payroll Edge.

This allows you to use the EOR’s already-existing infrastructure in Canada to get started. Working with an EOR also enables you to remain in compliance with Canadian employment law and offer your Canadian workers excellent benefits package options including an RRSP employee matching program. Contact us to learn more!