RPP to RRSP Transfer: Understanding Your Options & Implications

RPP and RRSP programs are savings accounts created by the Canadian government in order to help employees save. In some ways they are similar to American accounts like IRAs, in that they are often offered by businesses and are designed to be effective, tax-sheltered methods of saving money until retirement and then accessing the funds. There are several key differences between an RPP and an RRSP that cause some account holders to switch between the two.

RRSP

RRSP stands for registered retirement savings plan. This is a type of plan that is used by the Canadian government to help individuals save money through a retirement account. Canadians start these accounts through banks and other financial institutions and then deposit money into them over time. Deposits are tax deductible, and interest is not taxed until the money is actually taken out at retirement age, allowing users to dodge many tax burdens associated with income. Like IRAs, RRSPs are often flexible, but do have contribution deadlines.

Transferring to RRSP

An RPP is a registered pension plan, a type of retirement account that is created by an employer and the Canada Revenue Agency for employees. This account has some of the same advantages as an RRSP but is often tied to an employer or at least the choices that an employer has made regarding investment. As a result, many Canadians, upon changing jobs or altering finances, transfer their RPP funds into RRSPs. This is a very common rollover practice and is widely allowed.

Benefits

Canada allows large lump-sum amounts to be transferred directly into an RRSP from an RPP, which means that users do not need to transfer smaller amounts by themselves over a long period of time. This makes the transfer process quickly and ideal for switching between the two.

Limitations

RRSPs do have innate limitations that users should be aware of before making the transfer. Usually, transferring a large lump sum from an RPP requires that the RRSP be lock-in. This means that the funds in the account will not be accessible until the individual has reached retirement age. Fortunately, this is when additional tax benefits kick in, but it still limits the usage of funds.