Let’s take a look at the most common types of plans and how they can fit in with your Plan for life.
If you’re a Canadian and you’re 18 years old or over, you must contribute to one of these government plans:
Pension plans
Canada Pension Plan (CPP)
The Canada Pension Plan (CPP) provides contributors and their families with retirement, disability, survivor, death, orphans and children’s benefits. The CPP operates throughout Canada, except in Québec, which has the Quebec Pension Plan (QPP).
How do I contribute?
All employed Canadians who are 18 years old and over and whose employment income is greater than the basic exemption must contribute to the CPP (those working in Québec contribute to the QPP).
The amount you contribute is based on your salary, and your employer matches your contribution, effectively doubling it.
If you are self-employed, your contribution is based on your net business income (after expenses). If you are self-employed, you must pay both halves of the contribution (i.e. employer and employee).
To find out more, consult the CPP section on the Service Canada web site
Québec Pension Plan (QPP)
If you work or have worked in Québec, the QPP provides you and your family with basic financial protection in the event of retirement, death or disability. The QPP is very similar to the CPP, and both plans work together to ensure that all contributors are covered.
To find out more, consult the Régie des rentes Québec web site
Old Age Security (OAS)
OAS provides you with a modest monthly pension starting at age 65 if you have lived in Canada for at least 10 years. Your employment history is not a factor in determining eligibility, nor do you need to be retired. OAS pensioners pay federal and provincial income tax, and higher income pensioners also repay part or all of their benefit through the tax system (this is known as “clawback”).
To find out more, consult the OAS section on Service Canada web site
To find out how much you’ve contributed and to get an idea of how much you’ll get at retirement, you can obtain your CPP Statement of Contributions or your QPP Statement of Participation, and use the Canadian Retirement Income Calculator.
For OAS, you can qualify for the "full pension," or a "partial pension”, depending on how long you've lived in Canada after the age of 18. Also, the tax recovery (“clawback”) applies to high-income pensioners whose net income exceeds a certain amount.
If you’re like most Canadians, your government pension will only cover part of your needs at retirement. This is why we’re now going to look at other ways to save for retirement.
The difference between registered and non-registered plans
For income tax purposes, individual and group savings plans fall into one of two categories: registered or non-registered.
Registered plans, like RRSPs, TFSAs and pension plans, are registered with the Government of Canada and are governed by the Income Tax Act. They offer certain tax deferral or tax-sheltering advantages, but will only let you contribute within certain limits.
Non-registered plans are usually designed for contributions above and beyond the limits set by registered plans. Contributions are not tax-deductible, and investment income is taxable.
Types of individual savings plans
Individual plans offer you a number of ways to save and grow your money. You can get a savings plan through your financial institution.
- You can choose a plan that suits your needs, your goals and your financial situation
- You can save for emergencies (job loss), short-term goals (vacation, new furniture), or the long term (first home, retirement)
- These plans are not affected if you change jobs
Registered Retirement Savings Plan (RRSP)
An RRSP is a retirement plan, registered with the Government of Canada to which you can contribute over time if you have "earned income" such as employment earnings, self-employment earnings, and certain other types of income.
Through an RRSP your money may be invested in a variety of investment vehicles.
How it works
You can contribute to an RRSP through lump sum or regular contributions. The amount you can contribute during the year is indicated on the Notice of Assessment you get from the Canadian Revenue Agency after you file your income tax return.
Advantages
- Your RRSP contribution can be used to reduce your taxable income, and therefore how much tax you pay
- Any income you earn in the RRSP is exempt from tax as long as the funds remain in the plan. You only have to pay tax when you cash in or make withdrawals.
- It is an easy way to save for retirement, while enjoying tax benefits now
Remember
- You’ll still eventually have to pay taxes on your contributions and earnings. You’re just putting off paying them until you start withdrawing funds from the plan.
- Your contribution limit for the year is printed on your Federal Notice of Assessment.
- If you earn income below the basic personal tax exemption, it may not be worthwhile to invest in an RRSP as it will provide no tax benefits
Tax-Free Savings Account (TFSA)
A TFSA is a registered plan that allows you to save money without paying tax on the income you earn. And you can use the money whenever you want for whatever you want.
How it works
Every year, you can contribute up to the limit set by the government, plus any unused contribution room from the previous year. Unlike an RRSP, you contribute with “after-tax” money, so your withdrawals are not taxed.
Advantages
- You can save for whatever you want and use the money whenever you want
- Your money grows tax-free and it’s still tax-free when you take it out
- You can withdraw money from the TFSA at any time, for any reason, with no tax consequences. Withdrawals will not affect your eligibility for federal income-tested benefits and credits, such as:
- Your Old Age Security (OAS) benefits,
- Guaranteed Income Supplement (GIS),
- Employment Insurance (EI),
- Canada Child Tax Benefit (CCTB),
- the working income tax benefit (WITB),
- the goods and services tax/harmonized sales tax credit, or
- the age amount.
- Unused contribution room is carried over into the following year, and any withdrawal creates additional contribution room in the following year.
Remember
- There is a limit to how much you can contribute to your TFSA in a calendar year
- If you withdraw money, you cannot reinvest it in your TFSA in the same year unless you still have contribution room. Withdrawals will only create contribution room in the following year. Government of Canada’s TFSA site.
- Unlike an RRSP, contributions to the TFSA are not deductible for income tax purposes
- Any income you earn and any withdrawals you make are tax-free
Non-Registered Savings Plan
A Non-Registered Savings Plan (NRSP) is usually designed for contributions above and beyond government RRSP and pension limits, so it lets you save more to carry out your plans (education, trips, a house, etc.) or increase your retirement income.
How it works
- A NRSP plan has many of the same product features as registered plans, including investment options.
- However, contributions you make into a NRSP are made with your “after tax” monies (i.e. tax has already been paid), so they are not tax-deductible.
Advantages
- Complements your registered plans by letting you save more for the short term (financial cushion, vacation, etc.) or the long term (retirement)
- You can withdraw the money when you want.
Remember
- A NRSP does not have the tax advantages of registered plans: your contributions are not tax-deductible and your investment income is taxable.
Compare the tax benefits of TFSAs, RRSPs and non-registered savings (PDF, 130kb)
If your employer offers a group savings plan, it is an excellent opportunity for you to save consistently for retirement.
- Payroll deductions let you contribute regularly and, depending on the plan, you can also enjoy immediate tax benefits: since your tax is calculated on a lower amount – your gross income minus your contribution – you pay less tax throughout the year instead of receiving your refund only when you file your personal income tax return.
- With certain types of plans, your employer contributes as well
- Through group buying power, you may enjoy higher interest rates and lower investment management fees than you would with individual plans. Note that Investment management fees may vary depending on the amount to be invested, the funds selected and the type of product chosen. It is recommended that you compare product fees and features before making a decision.
The difference between Defined Benefit (DB)
and Defined Contribution (DC) pension plans
Company pension plans are usually either Defined Benefit (DB) or Defined Contribution (DC) plans. It’s important that you understand the type of plan you have, and the risk and responsibilities that come with each.
Defined Benefit (DB) plan
A defined benefit plan defines the benefits to be paid to each member, by a formula related to the member’s length of service or length of service and earnings. The method of calculating pensions may vary as to detail, but the amount of benefits payable is determined according to a definite formula set forth in the plan.
The amount of pension does not depend on the cost of the benefits or on the investment return of the pension fund. It is the employer’s responsibility to ensure that the specified benefit is paid.
The plan may be designed to integrate with expected benefits from the Canada/Quebec Pension Plan.
Defined Contribution (DC) plan
With a DC plan, you know the amount that you and your employer contribute, but not how much you’ll get at retirement. That will depend on contributions made, investment selection, return on investment, and other factors at the time you retire. However, you always know exactly how much is in your plan.
How do I tell the difference?
If it tells you how much you’ll receive at retirement, it’s a:
If it tells you how much you have in your retirement account right now, it’s a:
The most common types of group plans
Registered Pension Plan (RPP)
An RPP is generally an arrangement by an employer to provide pension benefits to retired employees. An RPP can be either a Defined Benefit or Defined Contribution plan.
How it works
- If you’re a member of such a retirement plan you and your employer, or sometimes just your employer, make contributions to this plan until you leave the company, retire or die.
Advantages
- Your employer contributes towards your retirement income
- Contributions are made with “before tax” money
- You don’t pay taxes on contributions or investment earnings until you start receiving benefits
- Employer’s contributions are a non-taxable benefit
Remember
- With an RPP, it’s either your employer alone or you and your employer who contribute to your retirement fund
Group RRSP
A Group RRSP is a collection of individual RRSPs where the administration is centralized and carried out by a financial institution.
How it works
- If you’re a member of a group RRSP offered by your employer, you make contributions through payroll deductions
- You decide how much to contribute, the amount is deducted from your paycheque (or you can choose to make contributions on your own), deposited into your account and invested
Advantages
- With a group RRSP you get the tax savings immediately instead of having to wait until after you file your income tax return: since your taxes are calculated on a lower amount – your gross income minus the contribution – you pay less tax throughout the year instead of receiving your refund only when you file your personal income tax return.
- You get special benefits, such as access to financial representatives, great online tools, and, when offered through your employer, convenient payroll deductions.
Remember
- Combined contributions to your group RRSP and to any individual RRSP you may have must not exceed your contribution limit
Group TFSA
Like an individual TFSA, a group TFSA allows you to save money without paying tax on the income you earn. And you can use the money whenever you want for whatever you want without paying taxes on the withdrawn amount.
How it works
- You can make contributions either through payroll deductions (if the group TFSA is offered through your employer), by cheque or preauthorized direct payment, and your contributions are then deposited into your account
Advantages
- Group benefits, such as access to financial representatives, great online tools, and, when offered through your employer, convenient payroll deductions.
Remember
- Combined contributions to your group TFSA and to any individual TFSA you may have must not exceed your annual TFSA contribution limit.
- It’s your responsibility to ensure you do not exceed your annual TFSA contribution limit. Check your Federal Notice of Assessment.
Group NRSP
A group non-registered savings plan works the same way as an individual NRSP with the added advantages of:
- Contributions through payroll deduction, if the group NRSP is offered by your employer, which means you contribute consistently
- In some cases, your employer might contribute as well
- You get group benefits, such as access to financial representatives, great online tools, and, when offered through your employer, convenient payroll deductions.
Deferred Profit Sharing Plan (DPSP)
A DPSP is a registered plan whereby an employer shares the profits made from the business with all employees or a designated group of employees. Employees are not allowed to contribute.
Employees receiving a share of the profits paid out by the employer do not have to pay federal or provincial taxes on the money paid into their DPSP until it is withdrawn.
How it works
- If you’re a member of such a plan, the amount from the share of profits of money is credited to an account in your name and invested, so that they earn investment income over time.
- Your employer’s contributions are vested no later than after 2 years of participation, meaning you become entitled to these contributions.
- When you retire, the money in the account to which you are entitled can then be used to buy a retirement income
Advantages
- You don’t pay taxes until you start withdrawing the money.
- Once vested, your employer’s contributions are not locked-in and you may withdraw them if your employer allows it.
- You get group benefits, such as access to financial representatives, great online tools, and, when offered through your employer, convenient payroll deductions.
Remember
- If you leave the company and have met the vesting requirements, you are entitled to receive a payment from the plan
- If you are not vested, you give up your right to whatever value was accumulated under your account (i.e. your employer’s contributions and earnings)
Employee Stock Purchase Plan (ESPP)
This is a plan that lets you purchase shares in your company.
How it works
- You contribute to the plan through payroll deductions, and your employer uses the funds to purchase shares in the company on your behalf.
Advantages
- Possibility of matching contributions from your employer
Remember
- You still need to be sure your investments in your overall portfolio are diversified. Don’t put all your eggs in one basket.
We’ve looked at the different types of plans. Now how do they make money?
