A Registered Pension Plan is a trust registered with the Canada Revenue Agency and set up by your employer or sponsor to provide you with retirement income. The employer or sponsor is required to make contributions to the plan, and depending on which plan you have, you may be able to contribute too.
The employer/sponsor and employee contribute to the plan until the employee leaves the company or reaches retirement age. Upon retirement, the employee can withdraw the money for any reason.
How do I sign up for a Registered Pension Plan?
If you work full-time for a company that will contribute to an RPP to help you save for retirement, you’ll need to speak with your employer to find out how you can participate. They will help you set up an account with whichever financial institution handles RPPs for the company.
What are the two types of RPPs?
The 2 types of plans available in Canada are defined contributions plans and defined benefits plans. Both types of plans are registered with the Canada Revenue Agency (CRA) to provide you with tax advantages on both the money you contribute and the money your investments earn.
Defined Contribution Plans
Your retirement income depends on how much you and your employer contribute and how well it performs in the market
- Usually a percentage of your current income
- You and your employer or sponsor may both contribute
- You can choose the amount you contribute
- These plans have annual contribution limits that are the same as the limits for RRSPs
- When you decide to retire, your employer is responsible for ensuring that you are paid according to the promised payout
Defined Benefit Plans
- This plan is an account that holding yours and your employer’s contributions that will be invested
- How much you receive at retirement is based on how your investments perform
- Your retirement income is determined by a formula
- You and your employer/sponsor may both contribute
- Defined benefit plans set the payout, which means the contribution amount varies
- There is no yearly maximum contribution limit under a defined benefit plan
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What are the Contribution Rules for an RPP?
Under an RPP, your employer will send contributions on your behalf. If you want to contribute as well, make the necessary arrangements with your employer to deduct the amount from your paycheck.
Who Manages an RPP?
The financial institution your employer works with will manage the plan. That bank will work with several in-house and third-party administrators, trust companies, investment managers, and consultants.
Single-Employer Registered Pension Plans
Under a single employer pension plan (SEPP), a stand-alone employer, or a cluster of employers housed under the same corporate banner engage in and contribute to the same pension plan. A SEPP may be structured as a defined contribution plan, a defined benefit plan, or as a hybrid of both styles. SEPPs require the employers to make contributions to the plan and they must also cover any shortfalls.
Multi-Employer Registered Pension Plans
Under a multi-employer pension plan (MEPPs), two or more autonomous employers contribute to the same pension fund, which may either be a defined contribution plan, a defined benefit plan, or a hybrid model.
The pension recipients’ benefits under a defined benefit MEPP is calculated by the years of membership with the existing employer and time spent with previous employers.
What tax do you pay on an RPP?
A Registered Pension Plan is both a tax-deductible way to save and a tax-deferred way to invest.
The money that you or your employer/sponsor contribute to your RPP is tax-deductible, so you’ll save more of your income. This means you won’t pay taxes on the money you contribute.
Additionally, you won’t pay tax on your RPP investment earnings until you withdraw them from the plan. During retirement, your income is typically lower than it is during your peak working years. So by withdrawing later, you’ll most likely pay a lower tax rate.
What Happens to your RPP if You Leave Your Employer?
Most provinces in Canada uphold a law that says plan members are entitled to receive the benefits of both theirs and their employer’s contributions if they leave the company. However, there are some provinces that lack this law, and your employer may require you to work there or be a member of the pension plan for a period of time before you become vested. If you leave before that time period is up, you’ll keep your own contributions, but you’ll lose the portion your employer contributed.
When you leave your employer, there are a few options for managing your pension assets:
- Leave your assets in the plan.
- Transfer the value to another pension plan (if you’re joining one that allows transfers).
- Transfer the value to a Registered Retirement Savings Plan or other plan.
- Take the cash value.
RPP v RRSP
The largest difference between RPP and RRSP accounts is that an RPP is an employer-based account and the RRSP is an individual account. An RPP is managed by a financial service provider chosen by the employer, while investors in an RRSP choose their own provider and plans. RRSP are useful retirement tools because you have complete control over who holds the money and how it’s invested.
|Registered pension plan (RPP)
|Registered retirement savings plan (RRSP)
|Tax-free savings account (TFSA)
|What is it for?
|Retirement savings or other long-term expenses.
|The employer is required to contribute and the employee can choose to contribute.
|The employer can choose to contribute and the employee contributions can be voluntary or required.
|Only the employee can choose to contribute.
|How do taxes work?
|Contributions are tax-deductible and gains are exempt from taxes until payout. Employer contributions are exempt from payroll taxes.
|Employer contributions are taxable income.
|Money isn’t subject to taxes going in or coming out.
|What if you leave the company?
|Depending on your province’s legislation, you can keep all the contributions.
|You get to keep all of the contributions.
|You get to keep all of your contributions, and employer contributions aren’t usually a factor.
|When can you withdraw your money?
|Depending on your plan, you might be able to withdraw from the amount you’ve voluntarily contributed, but not from your required contributions.
|The employer might have restrictions in place as to when you can make withdrawals.
Which plan is best for you is entirely dependent on your situation. If your employer is willing to match your retirement contributions, you should absolutely open an RPP for monetary gains. If you aren’t employed full-time, you’ll have to open an RRSP or another non-employer-based savings account.
Contribution Limits for Defined Contribution Plans and Defined Benefit Plans
|Defined Contribution Yearly Contribution Limit
|Defined Benefit Yearly Payout Limit
|RRSP Contribution Limit
|Year’s Maximum Pensionable Earnings
|Unavailable at this time
|1/9 the defined contribution limit
|Unavailable at this time