U.S. 401(k) vs. Canadian RRSP: Major Similarities and Differences

Retirement planning is a pillar of financial security, but for Canadians—especially those with ties to the U.S., like dual citizens or cross-border workers—understanding the differences between a U.S. 401(k) and a Canadian Registered Retirement Savings Plan (RRSP) can feel like navigating a maze. Both plans are effective nest egg-building tools, yet they differ in their rules, limits, and benefits.  Whether you are considering cross-border moves or just wondering how these plans compare to each other, this guide dissects the major similarities and differences based on the most recent 2025 data. For tips on filing these contributions smoothly, see Stress-Free Tax Filing in Canada. Let’s dive in and clarify what these plans offer, so you can plan your future with confidence.

Key Similarities Between 401(k) and RRSP

The 401(k) and the RRSP are both intended to assist you in saving towards retirement with tax benefits, but their similarities make them attractive as long-term wealth-building tools. Here’s how they align:

Tax-Deferred Growth

Both plans allow your investments to grow tax-free until withdrawal. Regardless of whether you are investing in stocks, bonds, or mutual funds, both plans do not tax capital gains or dividends in the growth phase, which maximizes your savings over time. For example, a Canadian investing $10,000 in an RRSP could see it grow to $20,000 over 20 years without tax erosion, just like a 401(k). To optimize growth across your portfolio, explore Build a Diverse Portfolio in Canada.

Employer Involvement

Many 401(k) plans and some RRSPs benefit from employer contributions. In a 401(k), the employer usually contributes a percentage of what you are contributing, such as 50 per cent of your contribution up to a certain salary limit. Some Canadian employers offer group RRSPs with matching contributions, though this is less common than in the U.S. Check with your employer to see if this perk applies. 

Tax-Deductible Contributions

The contributions made in both plans lower your taxable income. According to the Canada Revenue Agency, a Canadian making a contribution to an RRSP can claim up to $32,490 (18% of the previous earned income) as a tax deduction in 2025. Similarly, U.S. workers can deduct 401(k) contributions up to $23,500, as outlined by the IRS.  

Taxed Withdrawals

When you withdraw funds in retirement, both plans tax the distributions as income. This ensures you pay taxes later, ideally when you’re in a lower tax bracket. For Canadians, understanding this similarity is key if you’re considering a 401(k) due to U.S. employment.

Key Differences Between 401(k) and RRSP

Although the plans share common ground, their differences may have a significant impact on your retirement strategy. Here’s what sets them apart:

Contribution Limits and Rules

In 2025, the RRSP contribution limit is $32,490 or 18% of your previous year’s earned income, whichever is lower, with unused room carrying forward indefinitely. For example, if you didn’t contribute in 2024, you can add that room to 2025. In contrast, the 401(k) plan allows employees to contribute up to $23,500, with a total limit (including employer contributions) of $70,000. Those over 50 can add a $7,500 catch-up, while those ages 60-63 get $11,250, per the IRS. The 401(k) does not permit any carryover of unused limits, and thus you have to utilize it or forfeit it each year.  

Setup and Accessibility

RRSPs are personal plans you establish with financial institutions or banks, and they allow you to be flexible in your investment options. Canadians are free to open an RRSP and run it on their own. Canadians are free to open an RRSP at any time and manage it on their own. A 401(k) is employer-sponsored, which restricts your choices of investments to the ones provided by the plan. If you’re a Canadian working for a U.S. employer, you may need to weigh this restriction.

Flexibility and Penalties of Withdrawal

RRSPs permit penalty-free withdrawals to certain purposes, such as the Home Buyers’ Plan (up to $60,000 to purchase a first home) or Lifelong Learning Plan; however, you have to repay these amounts. Withdrawals made regularly prior to age 71 are subject to withholding taxes. In a 401(k), any withdrawals prior to age 59 1/2 are subject to a 10% penalty in addition to taxes, unless the withdrawal is due to hardship or the new $1,000 Emergency Expense exception, which is still more restrictive than the RRSP regulations.

Roth Equivalents

The 401(k) has a Roth option (after-tax contributions, tax-free withdrawals). RRSPs lack a direct Roth equivalent, but the Tax-Free Savings Account (TFSA) is often used to achieve a similar effect for Canadians, which is a key consideration for cross-border tax planning. Learn more about optimizing TFSA strategies in How to Manage Your TFSA Account.

Conclusion: Plan Smart for Your Future        

Knowing the differences and similarities between a 401(k) and RRSP will enable Canadians to make a wise retirement decision, particularly when dealing with cross-border financial decisions. They both have tax benefits and growth opportunities, but the contribution limits, access, and withdrawal regulations serve various purposes. Being a Canadian investor, you may be asking yourself how these plans can fit into your specific circumstances–consult a financial advisor to align them with your objectives. For more information on retirement planning, explore globalinvestor.com or check your RRSP contribution room through CRA’s My Account.