# RRSP Vs DBP



## moneywise_2017 (Jan 1, 2017)

Hi, 

I'm currently employed with a company that offers a DBP but I'm on a contract basis. For contract employees, joining the plan is optional. The contribution is as high as 15% of the monthly paycheque that is matched by the employer. I'm now about to hit my 40th, and have been switching jobs without joining any pension plans, though some of the companies I worked for offered similar plans that I could have transferred service credit to my current employer to build service years. I'm now 6 months into my contract with other six months left until the end of the year. I pay so much taxes because of the threshold of my salary, and was thinking of joining the pension plan to get some money back when I file my taxes. Here are my concerns and hope you can help me with any information: 

1) If I join the plan now, will my RRSP room for the current year completely disappear? or will the RRSP room for the first 6 months I wasn't part of the plan be restored and then the last six months of the year and of my contract, I will lose any RRSP room? Since the rate is high at 15%, I'm concerned that I will lose any RRSP room to help me reduce my taxes and at the same time, I won't get the benefit of being part of the plan since the beginning of the year to benefit from the employer matching contribution and the service credit.

2) Most of the pension plans have a factor 80 with age +years of service = 80 and retirement as early as age 60 . If I don't join the plan at 40, I will lose this opportunity in the event I decide to continue with the same employer or switch jobs and transfer service credit with an employer that offers a similar plan.

3) My understanding that If I cease employment, my contributions will be kept in the plan for a period of time but will accrue interest and then I will be given the option to withdraw the commuted value in cash, transfer to RRSP or transfer to another employer. 

Given this information, what would you advise me to do given my age and that I have no service credit elsewhere or retirement plan except the CPP and my savings so far.

Thank you!


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## Jimmy (May 19, 2017)

1) I understand your RRSP room for 2018 is the lesser of on 18% of your 2017 income or $26,230. It is reduced if there is any pension adjustment from your employer.
Under a DB plan, the formula is your monthly adj x 9 - 600

http://www.advisor.ca/retirement/retirement-news/area-52-know-your-pension-adjustments-45085

Pension plans are usually a good deal. The employer contribution is a 100% gain typically.


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## fireseeker (Jul 24, 2017)

Your concern about losing RRSP contribution room and its attendant tax deduction is confusing.
First, contributions to a pension plan get similar tax treatment -- they also effectively create a tax deduction. (Though you might not _see_ it, given that the employer will adjust its tax withholding to account for the benefit plan contributions.
Second, as Jimmy points out, if your employer is matching your benefit plan contributions you are effectively doubling your money. How on earth could an RSP be better than that? (Unless you mean a group RSP with some employer matching.)
As for the future, you will indeed get back your contributions with interest if you leave the employer, although you may not get the matching funds if you do not vest in the pension plan. Vesting typically takes two years.
Finally, your pension plan sounds astounding -- 15% contributions from both sides and an 80 factor are huge.


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## Eclectic12 (Oct 20, 2010)

moneywise_2017 said:


> ... 1) If I join the plan now, will my RRSP room for the current year completely disappear? ...
> I'm concerned that I will lose any RRSP room to help me reduce my taxes and at the same time, I won't get the benefit of being part of the plan since the beginning of the year to benefit from the employer matching contribution and the service credit ...


First question is whether you are sure it is a DB pension, as you don't seem to be clear on RRSP contribution room is affected by a pension, be it a Defined Contribution or a Defined Benefit pension.

Either way, what RRSP contribution room you have earned is still available for use. 

What joining the DB (or a DC pension) will do is affect what RRSP contribution room is added *next* year.
When you filed your 2017 tax return, your 2017 earned income (not necessarily all income) was multiplied by 18% to a $26,230 cap, then a pension adjustment was subtracted.

If you weren't in a pension, the PA was $0 so that whatever was earned will be added to any unused RRSP contribution room as well as any RRSP contributions made but not yet deducted to end up with your 2018 RRSP deduction limit. Where you have always deducted the RRSP contributions in the same or previous tax year (i.e. a first 60 days contribution applied to previous tax year) - the two will be the same thing. 

For example, check out the *Image of RRSP/PRPP Deduction Limit Statement*. It is for the 2016 tax year where it ends up documenting the "RRSP Deduction Limit for 2017" and the "RRSP contribution room for 2017". The "Unused RRSP/RRPP contributions previously reported and available to deduct for 2017" is zero so it works out the same thing. Had it been $10K, the amount available to deduct would be the same but the contribution room would have been $10K lower.

https://www.canada.ca/en/revenue-ag...-you-find-your-rrsp-prpp-deduction-limit.html

You can also see the line item for subtracting the pension adjustment or other factors such as subtracting a net past service pension adjustment or adding a pension adjustment reversal (typically from leaving a pension).




moneywise_2017 said:


> ... 2) Most of the pension plans have a factor 80 with age +years of service = 80 and retirement as early as age 60 ...


YMMV as over four pensions now, I have never been offered a factor 80 one and have typically only been able to retire with a full pension at either age 62 or age 65. Saying "most pensions" is kind of like saying "most mortgages offer the ability to prepay 30% of the mortgage each year. They are all mortgages but what the devil is in the details. It may be true or it may not be true.




moneywise_2017 said:


> ... If I don't join the plan at 40, I will lose this opportunity in the event I decide to continue with the same employer or switch jobs and transfer service credit with an employer that offers a similar plan.


Part of the puzzle is how likely is another plan to be that similar where it allows transfers into the new employer's plan?

Going back to the four DB pensions I have been offered, three of four did not allow any transfers into the plan. The fourth did allow it but the proceeds from the last one would buy one month's credit so it wasn't worth transferring instead of contributing the proceeds to a LIRA what I control what the money is invested in.




moneywise_2017 said:


> ... 3) My understanding that If I cease employment, my contributions will be kept in the plan for a period of time but will accrue interest and then I will be given the option to withdraw the commuted value in cash, transfer to RRSP or transfer to another employer.


What jurisdiction is the pension under?
Most have been moving to vesting immediately. That means you would get your contributions + the employers contributions + gains as a minimum. 
If there is say a two year vesting period where you leave after one year, your contributions plus interest/investment income is all you would be entitled to.
https://www.fsco.gov.on.ca/en/pensi...ting-and-Locking-in-of-Pension-Benenfits.html 

For the last company I left, about thirty days after I left a letter arrived outlining the choices where I had to send back my decision relatively quickly. As I had been in the pension more than two years so that it was vested (immediate vesting hadn't been introduced yet), my choices were stay with the DB pension to have a capped, small payout or leave the pension to receive the proceeds. I chose to take the commuted value which involved a complex formula that looked at other factors such as age, sex, mortality, time to retirement, credits earned etc. Once the $$ were figured out, paperwork was filled out to transfer it to a locked in retirement account (LIRA).

https://www.thestar.com/business/pe...7/19/pensions_10_things_you_need_to_know.html
https://www.nestwealth.com/blog/what-is-a-lira


Where one has a defined contribution pension, in a lot of cases - there is no choice. One has to leave the pension. 


Cheers


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## Eclectic12 (Oct 20, 2010)

fireseeker said:


> ... As for the future, you will indeed get back your contributions with interest if you leave the employer, although you may not get the matching funds if you do not vest in the pension plan. Vesting typically takes two years.


This is becoming rarer ... the Feds, BC, Alberta, Manitoba, Ontario, Quebec and Nova Scotia all have immediate vesting.
https://retirehappy.ca/immediate-vesting-pensions/
http://events.snwebcastcenter.com/manulife/GBRS/Prod/Media/PDFs/SL/ge10129.pdf


Cheers


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