RRSP vs IRA: What Canadians Should Know

Short answer: RRSP is Canadian. IRA is American. They both encourage retirement saving, but the tax rules, contribution limits, and cross‑border treatment differ in important ways. If you’ve worked in both countries or browse U.S. financial content from Canada, understanding the distinctions will protect your savings and reduce unpleasant tax surprises.

RRSP in Canada: deduction first, tax later

Canadians contribute to a Registered Retirement Savings Plan (RRSP) using their available contribution room. Contributions are generally deductible against Canadian taxable income, your investments grow tax-deferred, and withdrawals are fully taxed as ordinary income. RRSP room is based on your earned income and is reported each year on your Notice of Assessment. If you participate in a pension plan, pension adjustments reduce your RRSP room. Unused room carries forward indefinitely, enabling catch-up when cash flow allows.

IRA in the United States: similar intent, different rules

Americans can contribute to Individual Retirement Accounts (IRAs)—Traditional and Roth—subject to U.S. limits and eligibility rules. A Traditional IRA can provide a deduction (subject to income and plan-coverage restrictions), with tax-deferred growth and taxable withdrawals. A Roth IRA uses after-tax dollars; growth and qualified withdrawals can be tax-free. While the broad purpose rhymes with RRSP, the mechanics diverge and the terminology doesn’t map one-to-one.

Key differences Canadians should recognize

• Jurisdiction: RRSPs are governed by Canadian law and the CRA. IRAs are governed by U.S. law and the IRS.
• Contribution limits: RRSP room is a percentage of earned income up to an annual cap; IRA limits are flat-dollar caps with age and income conditions. Don’t assume a U.S. headline number applies in Canada.
• Tax filing impact: RRSP contributions reduce Canadian taxable income. IRA deductibility depends on U.S. rules; this distinction matters if you are a U.S. taxpayer (citizen/green card) living in Canada.
• Withholding and withdrawals: RRSP lump-sum withdrawals trigger Canadian withholding tax; IRAs follow U.S. withholding conventions. For cross-border residents, the tax treaty may modify the final tax outcome.
• Employer plans: In Canada, group RRSPs and pension plans coexist with TFSAs and personal RRSPs. In the U.S., 401(k)s are the employer plan analogue; rollovers often end up in IRAs when Americans change jobs.

Cross-border: when life doesn’t fit neatly in one country

Many Canadians spend time working in the U.S., or Americans ultimately settle in Canada. In those scenarios, it’s common to hold a mixture of RRSPs, IRAs, and sometimes 401(k)s. The Canada–U.S. tax treaty provides relief so you’re not taxed twice on the same income, but it doesn’t eliminate planning concerns. Examples:

• Deduction recognition: For qualifying cross-border workers, the treaty can allow recognition of contributions made while temporarily working in the other country, subject to caps. However, the proof and paperwork burden is higher. Keep statements and pay records.
• Where you live at withdrawal: If you’re Canadian-resident drawing from a U.S. IRA, the U.S. may withhold non-resident tax and Canada will also tax the income. You typically claim a foreign tax credit in Canada, but the exact net depends on treaty rates and your province.
• RRSP while U.S.-resident: Historically, special IRS elections were needed to defer tax on RRSP growth (Form 8891, now generally covered by the treaty), but filers still must report foreign financial assets when required. Compliance remains essential.
• Investment constraints: Some Canadian institutions can’t hold U.S. IRAs, and some U.S. custodians restrict accounts when you give them a Canadian address. Before you move, ask providers what happens to your accounts and what trading access you’ll retain.

Transfers and conversions: what can and can’t be done

Direct transfers work well inside each country’s system—RRSP to RRSP, 401(k) to IRA, etc. Cross-border conversions (like rolling an IRA into an RRSP) are not routine and can create unexpected tax. If you withdraw from an IRA and contribute to an RRSP, you could face U.S. withholding at the source and Canadian taxation on the RRSP deduction schedule. There are limited cases where Canadians use RRSP contributions to offset income recognized from a U.S. plan distribution, but the timing, limits, and treaty interpretation are delicate. Professional guidance is recommended before attempting any cross-border “move” of retirement funds.

Currency, fees, and asset location

Cross-border investors wrestle with currency conversion costs and product availability. An RRSP is CAD-denominated by default, though many institutions offer USD sub-accounts. IRAs are typically USD. Think through:

• Foreign exchange costs: Frequent conversions erode returns. If you plan to retire in Canada, having a portion of assets aligned to CAD may reduce future currency risk.
• Fund structures: Canadian-domiciled ETFs and U.S.-domiciled ETFs live under different tax regimes. Holding U.S. funds in a Canadian non-registered account can create foreign reporting and withholding; inside RRSPs, some U.S. dividend withholding can be reduced, but not necessarily eliminated.
• Costs and access: Cross-border account restrictions can nudge investors into pricier products or limited menus. Compare fees and ensure you can implement a long-term asset mix in the account you’ll actually be allowed to use.

Common mistakes to avoid

• Assuming IRA advice applies in Canada: U.S. “backdoor Roth” tactics or RMD rules don’t map to RRSPs. Always confirm Canadian applicability.
• Neglecting the treaty details: Withholding rates, pension vs. annuity characterization, and residency drive outcomes. A small mismatch in forms can cost real dollars.
• Forgetting about attribution and spousal strategies: In Canada, spousal RRSPs can shift retirement income, but withdrawals within the attribution window may be taxed back to the contributor. U.S. IRAs don’t have the exact same spousal structure.
• Overlooking compliance: U.S. citizens in Canada face worldwide tax reporting. RRSPs can be treaty-protected, but failing to file accurately can jeopardize deferral.

A practical checklist for Canadians

• Confirm your residency for tax purposes this year; it drives where income is taxed first.
• List all registered accounts across borders (RRSP, TFSA, pension, IRA, 401(k)). Note custodians and address restrictions.
• Verify contribution room on your CRA Notice of Assessment; do not use U.S. limits for RRSP decisions.
• Ask providers about cross-border access before moving. Document any constraints in writing.
• If you’ll withdraw cross-border, estimate treaty withholding and Canadian tax, and plan to claim foreign tax credits where applicable.
• Simplify where possible inside each system (e.g., consolidate old U.S. 401(k)s into a single IRA, or old RRSPs at one Canadian institution) for clearer oversight.

This article is for education, not tax or legal advice. Cross-border rules change and depend on your facts. Consider working with an advisor who understands both Canadian and U.S. systems.