# Regular vs. Lump Sum Contributions



## gnome06 (Mar 12, 2012)

I can't decide whether to do regular payroll deductions to by company's Registered Pension Plan, or single lump sum to my RRSP...

Over the past few years I have maxed out my RRSP contribution room with a single lump sum contribution of my annual bonus. I have done this to avoid the heavy taxation that occurs on this bonus payment. 

This year, if I start doing regular payroll contributions to my company's Registered Pension Plan (RPP), they will match my contributions. This is free money, so on the surface, seems like a pretty sweet deal. But if I max out the contribution room this way, I am now contributing 50% of my pay cheque to the RPP, compared to 0% in the past. However, I figure the 50% I'm gaining from the company's contributions is almost entirely negated by the ~50% tax that is taken from my bonus. So...I'm not sure which way to go... it seems I either contribute 50% through the pay cheque, or let the tax man take ~50% of my bonus, meaning it doesn't matter which direction I go. 

Any recommendations on how best to approach this?

Also, I'm unclear, as far as contribution room goes how the RPP differs from an RRSP. I understand the RPP absorbs RRSP contribution room... Is that correct? The answer to this could of course negate any responses to my initial question...


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## MoneyGal (Apr 24, 2009)

I'm a little confused about why YOU are confused. You can do regular monthly contributions to your RRSP as well, and you can file a tax form with your employer which takes your regular RRSP contributions into account and adjusts your tax withholdings at source. 

In your shoes, I'd put enough money in the RPP to get the employer matching. Unless the investment options are truly awful, this is a no-brainer way to increase the yield on your contributed dollars. 

As for RPP versus RRSP contributions affecting your "room" - you are allowed to shelter from taxation a finite number of dollars in any given year. When you make contributions to an RPP, the number of dollars you can contribute to your RRSP goes down. However, because your employer offers matching, the total dollar value of your contributions in any given year will be HIGHER if you contribute to your RPP with employer matching than if you stick only with the RRSP contributions. 

As for the 50% tax rate on your bonus - this is a withholding tax only that will be adjusted when you file your taxes for the year - it is not (necessarily) the final tax rate applicable to those earnings. Finally, in your shoes I'd rely on the employer matching as a more likely bet than your bonus (as in, if I had to guess which one had a stronger likelihood of persisting, I'd go with the employer matching). 

Hope some of this is helpful!


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## DanFo (Apr 9, 2011)

your tax liability should be the same each year wether you lump sum it all in, in one shebang or drop it in gradually. definately take the companies free money..If your putting in half of your pay be sure your not over contributing to your RRSP. If there happens to be extra space come the end of the year you can still top the rrsp off with your bonus.


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## Zeeshan Hamid (Feb 28, 2012)

Never leave free money behind. Both RPP and RRSP are tax deductible just the same.


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## gnome06 (Mar 12, 2012)

Very helpful MoneyGal, thanks...apologies for the confusion! 

I don't understand how, because the employer offers matching in the RPP, it means I have a higher contribution room than I would with RRSP. How does this work? I thought that the contribution room was combined across any "registered" investment. Are the employer contributions not taken into account?

For the tax on the bonus, as I understand, it works like this... I get slammed on the one pay cheque with the bonus because for that one pay-day I am in the highest tax bracket, whereas ordinarily I'm not. Does that mean, when the return is done, I get the difference back between the highest tax bracket and my bracket? Does that make sense? 

The good news is, I am confident (call me crazy) that I will be able to continue maxing out my RRSP with my bonus indefinitely, I usually have a quite a bit left over.

I expected the recommendation would be don't give up free money...makes sense! But, I hate the fact I would now be contributing myself out of the may cheque instead of just giving up my bonus. But, that's my emotional response...not always the best indicator.



MoneyGal said:


> I'm a little confused about why YOU are confused. You can do regular monthly contributions to your RRSP as well, and you can file a tax form with your employer which takes your regular RRSP contributions into account and adjusts your tax withholdings at source.
> 
> In your shoes, I'd put enough money in the RPP to get the employer matching. Unless the investment options are truly awful, this is a no-brainer way to increase the yield on your contributed dollars.
> 
> ...


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## Eclectic12 (Oct 20, 2010)

gnome06 said:


> Very helpful MoneyGal, thanks...apologies for the confusion!
> 
> I don't understand how, because the employer offers matching in the RPP, it means I have a higher contribution room than I would with RRSP. How does this work? I thought that the contribution room was combined across any "registered" investment. Are the employer contributions not taken into account?
> 
> ...


MoneyGal is almost always .... well, "On The Money" ,,,,  

< ... insert drumroll here ... >


As for "more contribution room than with the RRSP" - this does not sound right. Perhaps you are confusing more money put into the RPP with RRSP contribution room?

In similar RPP plans I've seen the details to, both yours and the employers RPP contributions are added up and recorded on your T4 form as the pension adjustment (PA). Your individual RRSP room is reduced by the PA. So if you put in $1K and the employer puts in $1K, the PA is typically $2K. If your existing RRSP contribution room is $40K, subtract the PA to find out what's left. So RRSP contribution room of $40K - $2K = $38K available going forward.


As for the tax on the bonus - don't sweat it too much. The "free money", unless the RPP investments options are really expensive/bad, this will likely outweigh the tax on the bonus.


And yes - if your total income reported on the tax return, after deductions is less than the tax rate applied to the bonus - there will be a refund. This happens to me every year, just based on the taxes applied to my overtime and my charitable donations. Check out your previous tax returns. You may have received a refund without putting all of the bonus in your RRSP.


IMO, the first step is to confirm what has been happening with your bonus, RRSP and final taxes on the income tax return in previous years.


Also - don't forget that even if you do have to pay taxes on the bonus - you can donate to your favourite charity or political party. This may be enough to put you in a lower tax range.


Then too - have you maxed out your TFSA? Once you've paid the taxes - it's always good to tax shelter what you can going forward. 

Or you could invest some of that money to benefit for the better tax rates of capital gains and dividends.



Cheers


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## MoneyGal (Apr 24, 2009)

Sorry, I was not clear. What I meant was, if you contribute $1000 to your RRSP (with no employer matching), your total tax-deferred retirement savings contributions are $1000. But if you contribute $1000 to your RPP, and your employer throws in another $1000 of matching dollars, your total contributions are now $2000. Magic!


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## gnome06 (Mar 12, 2012)

Alright...I think I'm getting to a good place.

My last concern I want to raise is that the RPP, unlike an RRSP, as I understand it does not allow me to take out the money. I don't ever plan on doing this, but you never know. I believe I can transfer it to an LRSP if I decided I don't like the investment options with the firm. I guess I'll just weigh up whether the additional money is more important to me than that flexibility. Any thoughts or considerations on this?


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## Zeeshan Hamid (Feb 28, 2012)

gnome06 said:


> Alright...I think I'm getting to a good place.
> 
> My last concern I want to raise is that the RPP, unlike an RRSP, as I understand it does not allow me to take out the money. I don't ever plan on doing this, but you never know. I believe I can transfer it to an LRSP if I decided I don't like the investment options with the firm. I guess I'll just weigh up whether the additional money is more important to me than that flexibility. *Any thoughts or considerations on this*?


Ultimately only you can make that decision for yourself. But in a way, having retirement money locked away is not the worst thing in the world. It protects people against themselves (not saying you need to be protected against yourself, just making a general statement). But leaving free money on the table makes me lose sleep, so for me free money almost always beats flexibility. 

In your case I'd contribute enough to RPP to get full employer match. Beyond that I'd contribute to RRSP with whatever contribution room you have left. Best of both worlds.


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## gnome06 (Mar 12, 2012)

That will do it then. Thanks to everyone for their responses. Extremely helpful...this forum is great!


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## gnome06 (Mar 12, 2012)

Actually, one further question... Does an RPP act like an RRSP in that anything contributed to it lowers my overall income for taxation purposes?


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## MoneyGal (Apr 24, 2009)

Yes!


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## Eclectic12 (Oct 20, 2010)

gnome06 said:


> Actually, one further question... Does an RPP act like an RRSP in that anything contributed to it lowers my overall income for taxation purposes?


As MG says ... yes.

This is easy to miss as the RRSP contribution has a receipt that is reported on the income tax return and generates a refund. All of this is a reminder that overall income is reduced.

For the RPP, everything happens behind the scenes. The employer gives the tax refund by reducing how much income tax is taken from the pay cheque. The only reminder is the pension adjustment (PA) that reduces the RRSP room.


Cheers


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