# How to use Stock Savings Plan properly?



## slayer (Apr 7, 2015)

My wife works for major oil company and she has, as a part of her compensation package, a Stock Saving Plan she can contribute to.

She can contribute up to 10% of her earnings to that plan by purchasing company's stock. The plan consists of two parts: *Registered Retirement Savings Plan* and *Stock Savings Plan - Vested*. She can choose how much to contribute to each part and currently has 5% to each part as it was a default setting upon joining the program, but it can be changed at any time. We don't know if this setting is right or wrong and looking for some advice on best practices in this area of personal finance.

Recently, my wife was talking to a colleague who said that she contributes 10% entirely to *Stock Savings Plan - Vested* and then at the end of the year transfers all of these contributions to *RRSP* to "save on taxes" as she put it. We are not sure this is correct thing to do, but if it is would like to do the same. I think there has to be some tax implications in such tactic I just don't know what they are.

As time goes by, there's more and more shares that are vesting (such as company contributed shares and shares from yearly bonus) and deposited into *Stock Savings Plan - Vested*. That process is reflected on T4, i.e. added to employment income un-taxed which was total surprise to us this year as we now owe about $2500 on our 2014 tax return (this is the main reason for my questions here).

So, is there something we need to change in this setup or simply plan to contribute more to *RRSP* every year to account for increased un-taxed earnings?


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## Eclectic12 (Oct 20, 2010)

I assume the "Stock Savings Plan - Vested" is a taxable account. 

The risk with starting in the taxable account then transferring to an RRSP at the end of the year is that if the stock drops - there may be less to transfer. If the same stock is already owned in the RRSP, then the superficial loss rules likely will kick in so that the capital loss can't be claimed - even where the stock is sold. One can choose to use cash to fund an RRSP contribution and leave the taxable shares as-is (i.e. avoid the superficial loss rules) but one has to have enough cash.
http://www.taxtips.ca/personaltax/investing/taxtreatment/shares.htm

If the shares go up in value then transferred to the RRSP, whether they are sold or not - one is deemed to have sold them and will have to pay capital gains taxes. I'm thinking this will be in addition to the T4 income tax you are already writing about but without the plan details, it is hard to tell.

http://www.taxtips.ca/personaltax/investing/transfersharestorrsp.htm



As for the "contribute more to RRSP every year to account for increased un-taxed earnings" ... you may already be aware of this but it is a common mistake so I will mention it. The RRSP contributions can be deducted from income, to make them tax free in that tax year. However, when withdrawn from the RRSP in a future year - the withdrawal will be taxed the same as employment or interest income. I prefer to think of the RRSP as tax deferred. Depending on what one estimates the income level will be at the time of withdrawal - one may prefer to keep it in the taxable account so that most of the taxes owed will be as capital gains taxes.


Cheers


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## OnlyMyOpinion (Sep 1, 2013)

Below are some considerations. Really, she can only properly get an answer to your questions by talking to her company HR rep:

i) Is her 10% contribution matched by the company? It is likely that it is at least up to some %. If so, she should at the very least be maximizing her % contribution to take advantage of the company matching. If they only contribute up to say 5% then you should give thought to whether this is where/how you want to save an additional 5%. For some it is a very good way to force savings as it comes right off of the paycheck. Others have an alternate savings plan/account and would choose to only contribute into the company plan up to the company matched %. 

ii) Similar to above, you might wish to put all of your contribution (and the company match) into the stock savings plan and none into the RRSP if you already have RRSP's set up outside the company that you contribute to. If not, then the company sponsored RRSP may be a good deal. That would depend if there is any annual fee, what investments and investment charges there are - compared to what you can get elsewhere (what is your money currently invested in within the RRSP?). 
You also need to know whether this RRSP is offered in lieu of a company defined benefit or defined contribution pension plan? In that case it is quite possible that this is the only option for a portion of the company's matching contribution.

iii) It is likely that you can sell shares and take the cash out of your stock savings plan at some frequency (possibly each year). Some people will 'let it all ride' and keep the full amount of shares as they build up over the years. This has the same risk as owning only one company in your investment portfolio, in addition to the fact that your paycheck is dependant on the same company. Everyone's tolerance for such risk is different but most would advise you to periodically cash in and diversify those savings into other investments. The thing that may be different right now though is that oilcos have been hammered in the last 6mos - I would certainly be inclined to let company shares build up for the next few years. There seems a good chance to make decent gains over the next 5 years or so. This of course is also contingent on the performance of the particular company.


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## slayer (Apr 7, 2015)

Wow guys, lots of reading needs to be done. I will reply to some of the questions bit later today.

Thanks so much!!!


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## slayer (Apr 7, 2015)

Eclectic12 said:


> I assume the "Stock Savings Plan - Vested" is a taxable account.
> 
> As for the "contribute more to RRSP every year to account for increased un-taxed earnings" ... you may already be aware of this but it is a common mistake so I will mention it. The RRSP contributions can be deducted from income, to make them tax free in that tax year. However, when withdrawn from the RRSP in a future year - the withdrawal will be taxed the same as employment or interest income. I prefer to think of the RRSP as tax deferred. Depending on what one estimates the income level will be at the time of withdrawal - one may prefer to keep it in the taxable account so that most of the taxes owed will be as capital gains taxes.
> 
> ...


Yes, Stock Savings Plan - Vested is a taxable account, yet taxes are not deducted upon vesting but rather amount just added to earnings on T4 and that's why we noticed it this year as we now owe what seems to be the tax on that amount.

The idea we have is some sort of happy medium where we can just break even, i.e. have just enough RRSP deposits to cover for Stock Savings Plan - Vested deposits.

Is this even possible without doing something super complicated?

Thank you!!!


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## slayer (Apr 7, 2015)

OnlyMyOpinion said:


> Below are some considerations. Really, she can only properly get an answer to your questions by talking to her company HR rep:
> 
> i) Is her 10% contribution matched by the company? It is likely that it is at least up to some %. If so, she should at the very least be maximizing her % contribution to take advantage of the company matching. If they only contribute up to say 5% then you should give thought to whether this is where/how you want to save an additional 5%. For some it is a very good way to force savings as it comes right off of the paycheck. Others have an alternate savings plan/account and would choose to only contribute into the company plan up to the company matched %.
> 
> ...



i) For every dollar my wife contributes, the Company contributes $1.50

ii) My wife has no other RRSP setup outside of the one that her company setup and contributes to along with her own contributions as per my initial explanation. I don't believe there's any annual fees and the only investments is the Company's shares. There's no Pension Plan of any kind at this company, the only benefits are Stock Savings Plan ( RRSP and Non-registered account as per initial description), Share Bonus Program that eventually vests into Stock Savings Plan and Stock Option Plan.

iii) I was actually thinking of opening an RRSP account at Questrade and doing some self directed investing or if this appears to be too difficult after good amount of research go to financial adviser that I've been using. I think performance of this company is pretty good as all of the Stock Options she can exercise is above the grant price by at least about $5 per share, some grants are as much as $13 above grant price right now. I do realize that share price is volatile and can change at any time.

Our immediate need is to establish the way to avoid paying all that extra tax at year's end. So far I can see that moving all of her 10% contribution towards RRSP is one of the solutions. I'm still not sure about her colleague's method of "contributing 10% entirely to Stock Savings Plan - Vested and then at the end of the year transferring all of these contributions to RRSP" as right one.

Looking forward to all your replies, this is really helping to weed through all the stuff I'm trying to figure out.


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## Eclectic12 (Oct 20, 2010)

If it's all RRSP ... I'd expect there would be no tax bill. Plus, if there is the ability to transfer to another RRSP after a set time, one can periodically sell some to make sure it is not overly concentrated in the one stock.

Where one contributes cash to one's RRSP, there won't be any additional income. As well, one can buy other investments (will also help the over-concentration). It might be too late for this year but I'd be investigating a $2400 cash RRSP contribution. If you talk to the plan administrator, you should be able to either find info or get an answer to what the T4 amount might be like for next year.

You might have a bit of an RRSP deduction from the RRSP part ... but they might have already given the tax deduction off the T4 as the company knows about the employment income as well as the stock plans.
Charitable donations will give a credit but I don't think it will be as effective as an RRSP contribution.

There are several variables so it might take some experimenting to decide what one likes the most.


Cheers


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## 0xCC (Jan 5, 2012)

Eclectic12 said:


> If it's all RRSP ... I'd expect there would be no tax bill. Plus, if there is the ability to transfer to another RRSP after a set time, one can periodically sell some to make sure it is not overly concentrated in the one stock.
> 
> Where one contributes cash to one's RRSP, there won't be any additional income. As well, one can buy other investments (will also help the over-concentration). *It might be too late for this year but I'd be investigating a $2400 cash RRSP contribution.* If you talk to the plan administrator, you should be able to either find info or get an answer to what the T4 amount might be like for next year.


As Eclectic12 points out, if the stock purchases go directly into an RSP account there shouldn't be any surprise tax bill and depending on how the company handles the tax related to the employee portion of the contribution there might be a surprise refund or not. One important thing to note though is that in order for you to not have a surprise tax bill at tax return time (as you seem to have found out this year) you have to make a dollar for dollar contribution to an RSP equivalent to what the company has contributed. It sounds like only the employer portion of the contribution wasn't properly taxed throughout the year which is what I am basing that statement on. If both the employee and employer portions were not taxed properly then you have to make a dollar for dollar RSP contribution on the entire amount.

As for the part I bolded above, it sounds like you have a surprise tax bill this year of $2500. In that case you need to make an RSP contribution of $2500/(your wife's marginal tax rate) in order to bring the tax owing down to $0. So if your wife makes between about $41k and $70k in Ontario the contribution would need to be $2500/.3115 = $8025 (based on tax rates found here: http://www.taxtips.ca/taxrates/on.htm).


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## gardner (Feb 13, 2014)

If I get the RRSP one right then what I hear is that:

-- employee can go up to 10% of her regular income.
-- for every $1 employee puts in, the company matches $1.50. ie: $1.00 --> $2.50.
-- this then buys company stock to sit in the RRSP.
-- the whole $2.50 is RRSP contribution room. The $1.50 extra is income

The matching rate sounds really good. To decide if I wanted to take part, I think I'd want to know:

Once the stock is there in the RRSP, is it locked in?
Is it a partial lock in of the % the company paid for, all, none?
Does the lock-in last after I quit or get laid off?
Is there a "vesting period" for the lock-in?

My concern would be to be able to get at least the money I put in into something other than the company stock. I would want to convert it to a couch potato formula. If the company money is tied up in a particular stock, so be it.

Is the stock genuinely investable? If it's a speculative nickle miner or something I would be afraid. If its a bank or telco or utility I might feel better about keeping it.


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## slayer (Apr 7, 2015)

0xCC said:


> As Eclectic12 points out, if the stock purchases go directly into an RSP account there shouldn't be any surprise tax bill and depending on how the company handles the tax related to the employee portion of the contribution there might be a surprise refund or not. One important thing to note though is that in order for you to not have a surprise tax bill at tax return time (as you seem to have found out this year) you have to make a dollar for dollar contribution to an RSP equivalent to what the company has contributed. It sounds like only the employer portion of the contribution wasn't properly taxed throughout the year which is what I am basing that statement on. If both the employee and employer portions were not taxed properly then you have to make a dollar for dollar RSP contribution on the entire amount.
> 
> As for the part I bolded above, it sounds like you have a surprise tax bill this year of $2500. In that case you need to make an RSP contribution of $2500/(your wife's marginal tax rate) in order to bring the tax owing down to $0. So if your wife makes between about $41k and $70k in Ontario the contribution would need to be $2500/.3115 = $8025 (based on tax rates found here: http://www.taxtips.ca/taxrates/on.htm).


We are leaning towards adjusting her contributions with entire 10% going to RRSP and not contributing to Stock Savings Plan - Vested anything at all. I figure that all that extra 5% in RRSP contributions should be able to cover if not everything but most of the non taxed earnings that got her in trouble this year and cover the rest with separate RRSP contribution when we calculate taxes way before RRSP deadline next year.

BTW, we are in Alberta.


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## slayer (Apr 7, 2015)

gardner said:


> If I get the RRSP one right then what I hear is that:
> 
> -- employee can go up to 10% of her regular income.
> -- for every $1 employee puts in, the company matches $1.50. ie: $1.00 --> $2.50.
> ...


I can't confirm that these assumptions are correct regarding "the whole $2.50 is RRSP contribution room. The $1.50 extra is income", but I think that only $1 is what counts towards RRSP contribution and $1.50 is extra income not taxed.

As of right now, once stock is in RRSP we can only withdraw it wit all the tax implications of course. On another hand stock in SSP-V can be either withdrawn or transferred to TFSA or RRSP.
I don't know if it's partial lock or not, it seems to be complete lock.
The part about when this lock stops needs to be investigated further, I don't know.
There's vesting period for all shares contributed by company.

The stock is genuinely investable, it's a huge oil company trading on TSX and NYSE, but like many mentioned here it's best to diversify investments if possible, we need to know how to do that best in our situation.

We are still trying understand how we should adjust that 10% distribution between SSP-V and RRSP.

Thanks so much for taking time to answer my question, I really appreciate this.


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## Zoombie (Jan 10, 2012)

slayer said:


> I can't confirm that these assumptions are correct regarding "the whole $2.50 is RRSP contribution room. The $1.50 extra is income", but I think that only $1 is what counts towards RRSP contribution and $1.50 is extra income not taxed.
> 
> As of right now, once stock is in RRSP we can only withdraw it wit all the tax implications of course. On another hand stock in SSP-V can be either withdrawn or transferred to TFSA or RRSP.
> I don't know if it's partial lock or not, it seems to be complete lock.
> ...




From the sounds of things I work at the same company you are referencing in your post. 

You are correct that the matching ($1.50) from the company is non-taxed, and will not be put automatically in the RRSP. That portion will vest to your wife on the first day of the next calendar year. (Actually 50% the next year, 50% the year following that). 

Really the only thing you need to consider is the price, and price accumulation of those shares during the year. If you deposit directly to the RRSP, any appreciation of those shares will be tax free (not including the withdrawal). If you hold the shares in a taxable account, and transfer to the RRSP at the end of the year you may get a larger tax refund (assuming some price accumulation) but you will also have a capital gains component to pay taxes on. 

My strategy is typically to wait for a time when market price dips below the average cost base, and then I transfer-in-kind to my TFSA. This way I pay no capital gains, and the accumulation is all tax-free. A similar strategy could be used for your RRSP contribution I would think, however waiting for a low share-price day to transfer would yield a smaller contribution to your RRSP. 

Hopefully that is helpful, as far as some of the questions posed by other posters I think you can figure that out with the plan information you received. Anything that hasnt vested yet will not be yours in the case of a sudden firing or if you decide to change jobs. 

Cheers


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## slayer (Apr 7, 2015)

Thanks Zoombie, this is very helpful. If you don't mind few questions.

How do you distribute 10% and why you do it this way?

How do you cover for un-taxed income, i.e. for VSVGPLAN line on your paystub, my wife checked hers and there's already pretty large sum which makes me think that at the end of the year it will be even greater than at the end of last year which resulted in tax owing as I described in my first post.


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## Zoombie (Jan 10, 2012)

PM'd.


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## lonewolf (Jun 12, 2012)

Slayer what is the name of the company ? Since it is a major oil company chances are there are options traded on the company. If they give you an extra $1.5 for every $1 worth of stock. I would try to figure out an option stratagy so if the stock drops you do not lose the dollar you put on the table. A 1.50 for every dollar put on the table you should be able to set up an option strategy so if the stock drops all your money would not be lost. Unless a complete meltdown occurs that resulted in counterparties not being paid there might be a way to use options to lock in profits regardless of what happened to the stock price of the company. I would consider looking @ the longest term or long term puts that are out of the money or far out of the money. I m sure someone like Humble would figure out a strategy for this one. 

If I was in this position I would not do this in registered account, I would save registered accounts for interest barring investments. If you do not have enough money to buy the company stock as well as max out RRSP & TFSA then you would have to figure that one out. Of course if you will be taxed @ a higher rate when money is being taken out of RRSP it might not be wise to max it out.


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## gardner (Feb 13, 2014)

If it's like the outfit I work for, the employment contract says that they control when you can trade and totally forbid trading in any sort of derivative, option, short.

I am mystified how extra money can get into your RRSP without becoming income and also cutting into your contribution room.

When I ask about lock-in, I am not thinking of potential withdrawal with tax implications, but in a potential transfer to another type of registered investment. Could you convert your shares into a GIC or transfer them in-kind to your SDRRSP?


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## Zoombie (Jan 10, 2012)

gardner said:


> If it's like the outfit I work for, the employment contract says that they control when you can trade and totally forbid trading in any sort of derivative, option, short.
> 
> I am mystified how extra money can get into your RRSP without becoming income and also cutting into your contribution room.
> 
> When I ask about lock-in, I am not thinking of potential withdrawal with tax implications, but in a potential transfer to another type of registered investment. Could you convert your shares into a GIC or transfer them in-kind to your SDRRSP?


Once the 'lock in' (vesting period) is up, you can sell your shares or convert them to GIC or sell the stock and buy shares of Google. You just need to transfer them to your own SDRRSP or your own non-registered account first. 

Any money that goes into your RRSP does become income first, and does cut into the contribution room. The 10% allocation can go to RRSP, but the company match must be transfered to the RRSP (after becoming income). The transfer into the RRSP uses contribution room at that point.


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