What is a Registered Pension Plan?
Published on February 12, 2025
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Table of Contents
What is a Registered Pension Plan?
A Registered Pension Plan (RPP) is a trust registered with the Canada Revenue Agency (CRA) and set up by an employer or sponsor to provide the employee with retirement income.
The main advantage of the RPP is that it offers tax benefits for employers and employees. Contributions made to the plan are tax-deferred, and the investment income earned within the plan will grow tax-free until it is withdrawn.
How does a Registered Pension Plan work?
The employer must contribute to the Registered Pension Plan (RPP), and the employee can choose to contribute depending on the type of plan. The plan continues until the employee leaves the company or reaches retirement age.
The employee pays half of the required contributions, and the employer matches the contribution made by the employee. Contributions made to the RPP are tax-deductible, and the funds can be invested to earn investment income that grows tax-free until retirement.
Generally, employees can’t withdraw money from the RPP until they retire, resign, or reach a certain age. Upon retirement, the employee can withdraw the money for any reason.
What tax do I 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. Your income is typically lower during retirement than during your peak working years. So, by withdrawing later, you’ll most likely pay a lower tax rate.
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 to participate. They will help you set up an account with whichever financial institution handles RPPs for the company.
There are two types of RPPs in Canada that provide you with tax advantages on both the money you contribute and the money your investments earn.
What are the two types of RPPs?
Defined Benefit Plans
With this plan, the retirement income you can receive is pre-determined based on a formula that often considers factors like your salary and years of service.
When you decide to retire, your employer is responsible for ensuring you are paid according to the promised payout, making the employer bear the investment risk.
Defined benefit plans provide a secure, predictable income in retirement, as the payout is guaranteed regardless of investment performance.
Defined Contribution Registered Pension Plans
With this plan, your retirement income depends on how much you and your employer contribute and how well it performs in the market, so there is no guaranteed retirement benefit.
The amount you can receive at retirement will be based on the total accumulated contributions and the returns on investments made during your working years, making the employee bear the investment risk.
The advantage of this plan is that it allows users to control their investment choices and offers flexibility in investment options for potentially higher returns.
Unsure if an RPP is right for you?
Discuss it with our tax professionals.
Who manages an RPP?
The financial institution your employer works with will manage the plan. That institution will work with several in-house and third-party administrators, trust companies, investment managers, and consultants.
Can I sign up for an RPP if I have multiple employers?
Yes, your plan will be under a multi-employer pension plan (MEPPs). Two or more autonomous employers contribute to the same pension fund, which can be a defined contribution plan, a defined benefit plan, or a hybrid model.
The pension recipients’ benefits under a defined benefit MEPP are calculated by the years of membership with the existing employer and time spent with previous employers.
What is the difference between a Registered Pension Plan (RPP) and a Registered Retirement Savings Plan (RRSP)?
An RPP is an employer-based account, and the RRSP is an individual account. Here’s a comparison of the two:
|
Registered pension plan (RPP) |
Registered retirement savings plan (RRSP) |
Tax-free savings account |
|
|
What is it for? |
Retirement savings or other long-term expenses. |
Anything. |
|
|
Who contributes? |
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. |
Anytime. |
What are the contribution limits for an RPP?
For the Defined Contribution (DC) Plans, the maximum annual contribution limit for 2024 is CAD$32,490.
For the Defined Benefit (DB) Plans, the yearly contribution limit is CAD$3,610.
How can I withdraw from an RPP?
Here are the rules governing withdrawals from Registered Pension Plans:
- Upon retirement: There is a guaranteed monthly income for life or a set period or you can transfer it to a Locked-In Retirement Account (LIRA) or Life Income Fund (LIF) for more control over withdrawals.
- Early withdrawal: You will be allowed to withdraw if you leave your employer before vesting or retirement or you face significant financial hardship (subject to plan rules).
- Lump-sum withdrawal: You can withdraw the commuted value (the lump-sum equivalent of your future pension income) if the plan allows you to do so and the plan sponsor no longer employs you.
