401(k) vs. RRSP: What’s the Difference?

401(k) plans in the U.S. and Registered Retirement Savings Plans (RRSPs) in Canada offer tax-advantaged ways to save for retirement. However, there are some important differences between these plans, which we’ll explore here.

401(k) vs. RRSP: Major Similarities

In many ways, 401(k) plans in the United States and RRSPs in Canada are very similar. The RRSP is the older of the two, created in 1957 as part of the Canadian Income Tax Act.

RRSPs are registered with the Canadian government and overseen by the Canada Revenue Agency (CRA), which sets the rules on annual contribution limits, contribution timing, and what kinds of investments are allowed.

401(k) plans came along about two decades later, when benefits consultant Ted Benna noticed that the Revenue Act of 1978 made it possible for employers to establish simple, tax-advantaged savings accounts for their employees. Benna created the 401(k) plan and secured Internal Revenue Service (IRS) approval for it.

Though many companies were hesitant to adopt them at first, 401(k) accounts gradually became popular. In 1983, 7.1 million workers participated in a 401(k) plan, a number that grew to 38.9 million by 1993. Data collected by the Bureau of Labor Statistics show that 73% of private industry workers had access to a 401(k) or similar defined contribution retirement plan in 2023.

The central idea behind a traditional 401(k) plan and an RRSP is the same, and they have similar tax advantages. First, participants may deduct contributions against their income. For example, if a 401(k) participant’s effective tax rate is 18%, every $100 that they invest in a 401(k) will save them $18 in taxes, up to their contribution limit. An RRSP works the same way.

Second, investment growth in both types of plans is tax-deferred, so participants are not subject to taxes until they withdraw the money in their retirement years.

401(k) vs. RRSP: Key Differences

401(k) plans and RRSPs are similar, but they also have some differences in how they work, including who sets up the plan and your maximum contribution limits. Here are some key differences in more detail:

Who Sets Up the Plan

One major difference between an RRSP and a 401(k) is who is responsible for setting up and managing the plan.

• A 401(k) is created and administered by an employer. You can’t establish one yourself unless you’re a business owner or self-employed.
• An RRSP can take many forms. It can be set up by an individual at any bank or financial institution. If an employer sets up a retirement plan, it is called a Group RRSP. These plans can also be initiated by self-employed individuals and by spouses.

Strict rules regulate RRSPs and what happens to funds at the termination of employment and after the death of the named individual.

Maximum Contributions

Both RRSP and 401(k) plans have annual contribution limits that vary from year to year, but their maximum amounts are different.

• For a 401(k), the limit was $22,500 in 2023, with an additional catch-up contribution of $7,500 for those aged 50 and older, allowing a maximum of $29,500. For tax year 2024, the limit increases to $23,000 and the catch-up contribution remains $7,500, which makes the maximum contribution $30,500 for those 50 and older.
• The RRSP contribution limit for 2023 was $30,780, increasing to $31,560 in 2024. In 2025, it’s $32,490.

Carryforward Rules

Another important difference between 401(k) plans and RRSPs is what’s known as carryforward rules:

• If you don’t contribute the maximum allowable amount to your 401(k) for a given year, then you’ve lost your chance to do so.
• With an RRSP, you can carry forward a portion of your unused allowance to future years if you didn’t make the maximum contribution in a particular year. This can be a very useful feature because you may be in a higher tax bracket in future years (when you’ll benefit more from the deduction). You may also have more cash to contribute to your retirement savings in later years.

Withdrawal Penalties

RRSPs are more lenient about allowing you to take money out early without penalties.

• A 401(k) imposes a 10% early withdrawal penalty in addition to any income taxes you owe if you take money out before age 59½, although there are some exceptions to this rule.
• An RRSP doesn’t penalize you if you take the money out before retirement, but you are subject to paying taxes on early withdrawals, which depend on the province where you reside and the amount you take out.

When You Reach Retirement Age

Both RRSPs and 401(k) plans have certain requirements when participants reach their 70s:

• With a 401(k), you typically must begin withdrawing a certain amount of money from your account by April 1 following the year when you turn 73. Then you must continue making withdrawals every year thereafter based on your age at the time. These are known as required minimum distributions (RMDs), and failing to follow the rules can result in penalties. The IRS publishes worksheets for determining the amount each year, and the age was most recently increased as part of the SECURE 2.0 Act.
• By the last day of the year when an RRSP holder turns 71, their RRSP balance must be liquidated or shifted to a Registered Retirement Income Fund (RRIF) or an annuity. An RRIF is a retirement fund similar to an annuity contract that pays income to a beneficiary or a number of beneficiaries. If the account is liquidated, the owner will owe taxes on the money right away. If they move it into a RRIF or an annuity, there are no immediate tax consequences, but they will owe tax on the income that they receive over time.

The Bottom Line

An RRSP can be considered the Canadian equivalent of the American 401(k), and vice versa. Both are retirement plans designed to encourage savings with similar tax benefits. However, these plans have some differences, including who can set them up and the maximum annual amounts that you can contribute. If you are moving from the U.S. to Canada or from Canada to the U.S., you can switch from one plan to the other, but you’ll likely face complicated tax consequences.