# Question about RSPs and pension plans



## Money4life (May 17, 2012)

Good day,

I've been in the pension plan at my current employment since Aug 2009. At the beginning, we were only able to contribute 2-4% of our pay to the pension and the company would match that percentage. For a while, I was only doing 2% because I was still a youngin fresh out of school but in the middle of 2010 is when I decided to bump it up to 4% and the company matched that. In September 2011, we were given the opportunity to contribute 5% to our pension plan and the company would match that...obviously I jumped over that and have been doing that ever since. Now we have been notified by our HR that the company will contribute 5% into our pension plan regardless if we make any contributions ourselves. 

My knowledge of investing has improved a bit over the years and I'm thinking of doing my entire RSP contributions into my own investments rather than to the one at work. I would still be a getting a 5% contribution from my employer into the pension plan. The company hasn't been exactly clear in which investments my pension plan is tied to and I think I would be more comfortable putting my money into investments that I understand. Is this a bad idea not contributing any of my money into the work pension plan or is it all a matter of preference?

One con I see of doing this is that I won't be getting interest right away (since contributions are currently taken bi-weekly from my pay starting at the beginning of the year). My plan going forward would be to make a large contribution into my own RSP investments in the middle of March and then top off the rest of the contribution in January of the following year (once I get the totals of what my employer contributed into my pension). That way, even though I'm not making contributions right away, I would still be getting a good return because of the large contribution that I made in March.

Does this make any sense? Thanks for any advise that is offered.


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## the-royal-mail (Dec 11, 2009)

I am not sure what kind of pension plan your work place has, but if it's a REAL one (ie. DB or DC and not one of those bogus PRPs etc) then I would urge that you NOT do this. Ask yourself what makes you think you can invest any better than their plan managers. Do you have any special cracker jack investing skills?

If anything, you should be trying to find out how you can invest MORE in your pension plan. The end payouts are far more likely to exceed your self-investing payouts unless you are a cracker jack investor and haven't told us about it.

Thumbs down from me.


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## Money4life (May 17, 2012)

the-royal-mail said:


> I am not sure what kind of pension plan your work place has, but if it's a REAL one (ie. DB or DC and not one of those bogus PRPs etc) then I would urge that you NOT do this. Ask yourself what makes you think you can invest any better than their plan managers. Do you have any special cracker jack investing skills?
> 
> If anything, you should be trying to find out how you can invest MORE in your pension plan. The end payouts are far more likely to exceed your self-investing payouts unless you are a cracker jack investor and haven't told us about it.
> 
> Thumbs down from me.


Thanks for the reply. It is a DC Pension Plan.

Unfortunately, I do not have any special cracker jack investing skills which is why I was just going to put my total contributions into index funds. Still a bad idea?


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## Eclectic12 (Oct 20, 2010)

Whether it makes sense to keep contributing to the company pension plan depends on a lot of things. A lot of company pensions have cheaper MERs than one can find on their own. Then too - can you transfer out of the company pension what you have put in (i.e. your contributions) so that your RRSP qualifies for cheaper costs?

Since the company is contribution 5% either way and if you are having difficulty finding out what investments the pension is in - it may be better to have it under your control. This assumes you are going to manage it (or have it managed). For example, having your contributions to your RRSP sit as a cash balance making 1.1% is probably not as good as what the company pension may make in the long term. Again, without details - it is hard to tell.


As for losing the interest - I believe you could stay with the bi-weekly bit, except have it contributed to your RRSP. If you file a "T1213 Request to Reduce Tax Deductions at Source for Year(s) _____ " form each year with CRA, you will be able to get the tax refund during the year instead of having to wait and can put the refund to work right away.
CRA Link: http://www.cra-arc.gc.ca/E/pbg/tf/t1213/t1213-12e.pdf

Then too - depending on what your RRSP allows for investments, interest through savings is one option. Or if your RRSP allows a broad range of investments, the following may be an option that pays interest (see other posts on CMF).
http://www.canadiancapitalist.com/rrsp-tip-2-park-your-contribution/


The other question is does your RRSP provide enough investment options for your future plans? What are the costs, if any? What does it allow for investments?


At the end of the day, what makes sense depends on you, what the pension offers and where you plan to go with this. Not matter what you decide, building your knowledge of investing/financial helps a lot.



Cheers


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## Money4life (May 17, 2012)

Thank you for the thorough response, Eclectic12.

What I have for my current RSPs are TD e-series Mutual Funds. Since I set up my TFSA and RSP mutual funds at the same time, this is what I have:

RSP: 11K in US Index (MER at 0.35%), 7.5K in International Index (MER at 0.50%)
TSFA: 11.5K in Canadian Index (MER at 0.33%), 7.5K in Canadian Bond Index (MER at 0.33%)

My logic here was that my RSP will be in it for the long term so it would be best to capitalize on the huge, broad markets that both the US Index and the International Index possess.

I do agree ultimately that I need to find out more information about my pension plan before I make any rash decisions. Do you think a pension plan could have MERs that low and cover the broad indexes that I have? It looks like the-royal-mail holds the DC pension plan in high regard.


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## Daniel A. (Mar 20, 2011)

Keep in mind that anything you put in the DC plan will be locked in, I wonder what the incentive is for your company to now say we will put 5% in and you do what you want on your side most have a matching ratio.

As long as you have the discipline to save contributing to your own RRSP will provide more options.
My own pension which I now collect is DB given that most companies have moved away from them DC is all that most offer and they don't come close to a DB. 
Anything you can get from a company is better than nothing.


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## the-royal-mail (Dec 11, 2009)

Hi Money4life, sorry if I came across as having 'tone' in my earlier message. I didn't intend to do that and will try to be a little more careful in the future when responding. Anyway, I feel that the DB and then DC pension plans are both superior to what individual investors like us can do. Remember that pension plans are administered by professionals who do this all day, every day. It is in their best interest to grow the funds as much as possible and they take a very active role in this. Remember while the rest of us are buying houses, working, paying traffic tickets and fretting about iphone plans, these pension administrators are doing their best to keep the funds in a position of growth. They know what they're doing. If by no other measure than common sense I simply do not agree that an average individual like us can do better than they do. If we could, what the heck are we doing in our current jobs and why are _we_ not working as pension administrators?

It's good that you are at least using low-fee index funds (as am I) for your RRSPs but I just cannot agree with your idea. I recommend you put as much money as you can in that pension plan and let the professionals do what they do. As Kevin O'Leary would say, "I forbid you to do this".

Just because you can do something, doesn't mean that you should.

Again, I mean this in the sincerest way possible with no tone intended.


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## Sampson (Apr 3, 2009)

Several problems with your post TRM.

First, there is no evidence that professional money managers do well. Your logic suggest they SHOULD, but evidence contradicts this.

Second, the OPs pension plan is a DC plan. In most DC plans, the pension holder and not the administrating company actually chooses from a list of funds, little more support than a normal RRSP.


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## Eclectic12 (Oct 20, 2010)

Money4life said:


> Thank you for the thorough response, Eclectic12.
> 
> What I have for my current RSPs are TD e-series Mutual Funds. ... I do agree ultimately that I need to find out more information about my pension plan before I make any rash decisions.
> 
> Do you think a pension plan could have MERs that low and cover the broad indexes that I have? It looks like the-royal-mail holds the DC pension plan in high regard.


You are welcome ... that's what CMF is for.

Having TD e-series is likely going to tilt the comparison to the favour of skipping putting your money into the DC pension and using the e-series instead.

Yes it is possible but not likely with the way companies contracting out their DC plans these days. 

For example, until this year - the supplemental pension at work had similar or cheaper MERs as the company negotiated the rates based on *all* business with the MF company. Now that they are in cost cutting mode, they've gone with a more usual setup (i.e. higher MERs).


The DC plan usually offers access to MFs so other than having investment managers following the MF's particular philosophy, you are likely still picking funds, just as with your RRSP. The big difference is your RRSP can offer a lot more choices, if you want them. The DC plan is whatever the company has contracted for & can change at any time, should your company feel they can save money.


Finally - I think getting info on your DC plan is critical. 

If you don't know the options, how confident can you be that the choice is a good one? 

Then too for me, if your company throws up a lot of road blocks when you are trying to find out info about _*your DC plan money*_ - that's a red flag that would make me prefer using my own RRSP as there is no reason for the DC plan to be a "black box" that you can't get info about.




Sampson said:


> Several problems with your post TRM....
> 
> Second, the OPs pension plan is a DC plan. In most DC plans, the pension holder and not the administrating company actually chooses from a list of funds, little more support than a normal RRSP.


Good points!

Though the bigger issue from the few DC plans I've been offered is the range of investments offered (as well as the costs). One DC plan offered four MFs ( Can & US equity; Canadian bond; Equity/Bond balanced; Money Market), as I recall, all had MERs starting at 2.8%. 


Cheers


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## Eclectic12 (Oct 20, 2010)

Daniel A. said:


> Keep in mind that anything you put in the DC plan will be locked in, I wonder what the incentive is for your company to now say we will put 5% in and you do what you want on your side most have a matching ratio...


It depends on the DC plan. I've seen some that lock-in all contributions and some that the employee's optional contributions can be transferred to their RRSP, once a year for free. I believe other's have posted that their DC plan allows part of the company matching funds to be transferred as well but personally have never been offer this.

As for what's in it for the company - the first thing that comes to mind is that it's a lot easier to plan for a fixed expense as opposed to a variable one. The second is that the HR paperwork (and DC plan) become much simpler and potentially more streamlined.


Cheers


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## Money4life (May 17, 2012)

Thanks guys for the feedback. And no, the-royal-mail, you didn't offend me with the minor tone from your original message.

So it is all a matter of preference! The-royal-mail is comfortable with professionals taking care of his pension plan while others in this thread feel it would be better to take care of it themselves. Well it turns out that I wasn't the only person at work with questions about the pension as there is going to be an 'information and learning session' this Thursday and I will be in attendance. They're giving us until Friday to make changes to our contributions if need be--generally, they only allow us to make such changes twice a year. I'll report my findings and let you know what I decide to go with.


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## Eclectic12 (Oct 20, 2010)

Money4life said:


> Thanks guys for the feedback...


You are welcome.




Money4life said:


> So it is all a matter of preference!
> 
> The-royal-mail is comfortable with professionals taking care of his pension plan while others in this thread feel it would be better to take care of it themselves.


IMO, I disagree. I don't believe that the professional manager with cracker jack investing skills that the-royal-mail is talking about with is available to you. 

Upthread you said you were in a DC pension - so likely you already have to select from a limited set of choices where your contributions are invested, similar to an RRSP that can offer more choices. Whether in the DC pension or an RRSP, you need to know about investing to make the good decisions about how much to put into which investment.

The type of active professional pension plan manager that the-royal-mail is talking about who has the least amount of restriction for investments is only available in two ways that I am aware of. The first and most common way is through a DB pension. The second is through an upscale advisor (ex. the one I know of wants a minimum $250K from each client). 

Now it is true that a DC pension that offers MFs have a professional (or team) managing the investments in the MF but there are a lot of restrictions. The first is what the MF can invest in. The manager may recognise Brasil as a great place to invest but if the MF being managed is limited to Canada/US equities, Brasil is not an option. Even if the manager is managing a MF that can invest in Brasil, if the DC pension the company contracted for does not offer that particular MF, then again Brasil is not an option for one's pension contributions.


IMO, as soon as the main DC pension investment choices are MFs, there is no difference in the "professional management" part as an RRSP that offers MFs provides the same thing. At that point, the important factors are the costs, possible matching funds from the company (i.e. free money) and the range of choice.

Some would argue investing knowledge but one is already picking in the DC pension so hopefully there is a basic knowledge already in place. If not, one can always stick with the DC pension while building one's investment knowledge and start using the RRSP later.

Cheers


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## Money4life (May 17, 2012)

I see what you're saying there, Eclectic12. That is probably what the-royal-mail meant by it being professionally managed. Thanks for this.

So I just had my 'information session' regarding my pension plan and it is a bit clearer now. It is a DC locked-in plan and only voluntary contributions can be transferred out into another RRSP...and that can only be done in retirement. During the presentation, there was no mention of asset allocations so I had to ask the question about where my invested money was actually going. The pension specialist said that the money is in a balanced mutual fund, asset allocations are about 55% equity and 45% bonds. She did not provide me further information in regards to which investments were actually in these percentages and said that she would "have to get back to me on that". Also, we are not allowed to change the asset allocations--everyone in the pension plan has to be in this fund. This is largely due to the fact that we're unionized employees; non-union employees have the option of choosing between different funds and selecting which asset allocation they would like. That information was a little murky but at least I was informed that the MER for our fund is only 0.37%. From my research, the MERs for non-union employees range anywhere from 0.55% to 0.70%. I now have until tomorrow to decide whether I want to continue making voluntary contributions or not.

Also, I asked this question in another thread but I think it got missed so I'll try again here:

Do deduction limits for RRSPs only pertain to contributions made into a personal RRSP investment or does that include contributions into a pension? I've been thinking it was both but now I'm confused after looking at my Notice of Assessment from Tax Year 2011. My RRSP deduction limit for 2011 was $18,436. I contributed $14,735 into my own investments during the year and that number appeared in the 'Allowable RRSP contributions deducted for 2011' column. I was under the impression that pension contributions were included in the 'RRSP deduction limit for 2011' so I did not want to over-contribute. My employer and I collectively contributed $4,310 into my pension plan and I notice that it comes up as '2011 pension adjustment'. If that is the case, could I have hypothetically contributed the full $18,436 into my own investments and not get penalized because my pension contributions only count as a 'pension adjustment'? Yes, I notice that the 'pension adjustment' gets subtracted by the 18% of earned income from the year but that still means that I could have made the full contribution of $18,436, correct?

Also, the new contribution room that appears as of midnight 01/01/2013... would that the total deduction limit for 2013? When contributing into a RRSP in January or February, does that count as a 2012 contribution or a 2013 contribution? Do we have a choice?

thanks!


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## Eclectic12 (Oct 20, 2010)

Money4life said:


> ...Also, I asked this question in another thread but I think it got missed so I'll try again here:
> 
> Do deduction limits for RRSPs only pertain to contributions made into a personal RRSP investment or does that include contributions into a pension?


The RRSP contribution limit pertains to all registered plans, whether it is an RRSP, DC pension or DB pension. This is so everyone is on a level playing field. 

The difference between RRSP contributions and pension contributions is that the RRSP contributions use up the room already earned while the pension contributions result in a pension adjustment (PA) that reduces the RRSP room *being* earned for the following year.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/206/menu-eng.html

I'll update this with an example after I run some errands.

*Adding Example:*

Say that:
a) the 2011 NOA listed RRSP contribution room = $6K
b) 18% of earned income = $12K
c) in Feb 2012, a $6K RRSP contribution was made, so the available room = $0.
d) the 2012 PA on the T4 is $4K.

On the 2012 tax return, the 2012 PA from the T4 slip will be recorded on line 206, so that when the RRSP room earned in 2012 is calculated by CRA, it will be

18% x earned income to a maximum - PA = $12K - $4K = $8K.

There is no unused room to add to the 2012 room so the number on the 2012 NOA will be $8K.


Note that the 2012 RRSP contribution reduced the 2011 NOA amount whereas the 2012 pension contributions are reducing what is earned in 2012 and available for contributions in 2013.


If you want more details, here is a link showing other factors which may come into play. (Ex. I've had the PSPA add back more room once in twenty years)
http://www.taxtips.ca/rrsp/rrspcontributionlimits.htm

I hope this helps.

Cheers


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## Eclectic12 (Oct 20, 2010)

Money4life said:


> ... Also, the new contribution room that appears as of midnight 01/01/2013... would that the total deduction limit for 2013?


No as all that is added on Jan 1, 2013 is contribution room earned in 2012 based on 18% of earned income and in your case, minus the 2012 PA. 

The NOA total amount takes into consideration any unused amounts that are still available to you. 

That's why the CRA warns on their web site that there is a maximum RRSP room that can be earned in a given year but since the NOA is the total amount, it might be higher.

If you look at chart 3 from this CRA link, you'll see the full calculation that results in the NOA total amount:
http://www.cra-arc.gc.ca/E/pub/tg/t4040/t4040-e.html#P1168_40407




Money4life said:


> ... When contributing into a RRSP in January or February, does that count as a 2012 contribution or a 2013 contribution? Do we have a choice?


It's up to you. Contributions made before the deadline (usually the first sixty days of the calendar year) can be assigned to either tax year. So a Feb 2013 contribution can be applied to either 2012 or 2013 tax returns. Note that it can also be recorded but not used until 2014, if there is a reason to do so.

Links:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/dts-eng.html 
(CRA hasn't updated this yet for the 2012 tax year)

http://www.moneysmartsblog.com/rrsp-contribution-limits-deadline/


Cheers


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## Money4life (May 17, 2012)

Hi Eclectic12,

Thanks for the information and examples that you've provided for me. You have been so helpful.

Unfortunately I was running out of time to make a decision so on Friday, I informed HR to let them know that I wanted to stop making contributions into my pension plan...but now I feel that I have made a mistake. On Friday, I spent the bulk of the evening looking over my notice of assessment and reading over my tax return from 2011. I was trying to estimate what my RRSP deduction limit would be for 2013, assuming that I will contribute the full $9,268 that has been given to me this year. I figured out what my 2012 earned income and pension adjustment will be for 2012. My earned income is actually going to be lower in 2012 than 2011 (because of some retroactive pay that was given to me in 2011) but my pension adjustment will be a bit higher. I did the math and saw that I would surpass my deduction limit in 2013 if I made my full RRSP contributions and 5% pension deductions from both the employer and myself. So I didn't feel bad that I changed my pension contributions from 5% to 0%. But then it clicked into me that I was forgetting about one major factor--TAX IMPLICATIONS.

Obviously the goal for filing taxes is to try and lower your taxable income as much as possible. I knew RRSP contributions lowered it but I really didn't know what else did. It appears that a 'registered pension plan deduction' also accounts for lowering your taxable income, which is different from an RRSP deduction. Also, I learned that Pension Adjustment (line 206) is completely different from a Registered pension plan deduction (line 207). Only lines 207-224, 229, 231 and 232 potentially lower your taxable income. So what this means is that in 2013, if I don't make any voluntary contributions into my pension plan, my taxable income will not be lowered. And the contributions from my employer will not provide any relief either. So really, what I should be doing is NOT make a full RRSP contribution this year because I can always carry it over. Full pension deductions should be the first priority (since I can only do it during the tax year) and if I have room, top it off with my own RRSP contributions; not the other way around! There is no maximum allowable pension contribution limit unlike RRSP contributions. Yes, the pension adjustment is subtracted from my earned income to determine my deduction limit but there is more flexibility with my room if I focus on pension contributions first. 

Does this make sense and if so, have I made a mistake with my decision or am I worrying too much?

Thanks guys for the help.

Money4life


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## Eclectic12 (Oct 20, 2010)

Money4life said:


> Hi Eclectic12,
> 
> Thanks for the information and examples that you've provided for me. You have been so helpful.


You are welcome. It's been a long process learning many things (ex. I had an RRSP plus pension for something like three years before the PA came to my attention and then another eight before my one & only Pension Adjustement Reversal).




Money4life said:


> Unfortunately I was running out of time to make a decision so on Friday, I informed HR to let them know that I wanted to stop making contributions into my pension plan...but now I feel that I have made a mistake...


Is this a yearly election? If so, worst case - it can be changed next year.





Money4life said:


> I did the math and saw that I would surpass my deduction limit in 2013 if I made my full RRSP contributions and 5% pension deductions from both the employer and myself.. But then it clicked into me that I was forgetting about one major factor--TAX IMPLICATIONS.
> 
> Obviously the goal for filing taxes is to try and lower your taxable income as much as possible. I knew RRSP contributions lowered it but I really didn't know what else did... Does this make sense and if so, have I made a mistake with my decision or am I worrying too much?


I haven't finished my first coffee so I reserve the right to change my mind, after I've taken more time to go over the details.

But yes, I think you are worrying too much.

If you are out of RRSP contribution room - there is no way to use RRSP room to reduce your taxes, until more room is earned. So it does not really matter what combination of pension, extra contributions to the pension and/or your own RRSP contributions that result in using up the available contribution room. Once you are out - you are out. 

The more pressing concern is to make sure you don't generate penalties by over-contributing (something like 1% per month).


Then too - if reducing taxes is the concern, then being out of RRSP room just means that one tool in the toolbox is not available. Others tools are such as charitable donations, political party contributions, transferring investments into your TFSA, etc. are still available to you. You should evaluate them to decide which, if any, make sense for you. 

You might want to separate the two items and post a separate threat in the taxation section to get more ideas of how to reduce your taxes. Or borrow a tax tip book from the library, search the web or other options.


Until I can process the paragraph with all the line numbers - keep this in mind. Even if you change your mind - understanding what is being done for what purpose is more important, IMO. Worst case, you might lose an opportunity here but you likely have many years to change the plan & possibly make up for a minor mistake. 

Doing nothing on the other hand or rushing into something - that could cost you for years & years to come. 


Cheers


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## Eclectic12 (Oct 20, 2010)

Money4life said:


> ...But then it clicked into me that I was forgetting about one major factor--TAX IMPLICATIONS...


Or maybe you are over-thinking it?

I'm not sure what tax implication that is being forgotten. Either way, pension or RRSP contributions - your taxable income is being reduced, as well as the total available RRSP contribution room.




Money4life said:


> ...I knew RRSP contributions lowered it but I really didn't know what else did. It appears that a 'registered pension plan deduction' also accounts for lowering your taxable income, which is different from an RRSP deduction......


Not really - both reduce net income, which affects taxable income (RPPD via line 207, RRSP via line 208). The main difference is how/when the RRSP contribution limit is affected. 

The RPPD has a matching PA, which CRA uses to reduce the RRSP contribution room earned in the same tax year and the net amount is added to the overall RRSP contribution room on Jan 1, next calendar year (i.e. 2012 tax year, 2013 is when the net amount is added).

The RRSP contribution is deducted from the RRSP contribution limit in the same year (ex. 2012 contribution, 2012 RRSP room has that contribution subtracted from it).


Overall - the net effect as of Jan 1 the following year is the same for both. The cavaet is a DB pension where a contribution of $12K may have a PA of $16K (i.e. not dollar for dollar like a DC or RRSP).


It's like buying 89 octane gas at Esso versus Shell. You drove to a different station using a different route but the car ends up with gas in the tank.




Money4life said:


> ...Also, I learned that Pension Adjustment (line 206) is completely different from a Registered pension plan deduction (line 207)...


Different but you can't have one without the other. The PA is the mechanism that reduces the RRSP contribution limit for the pension contributions.




Money4life said:


> ...Only lines 207-224, 229, 231 and 232 potentially lower your taxable income...


Not quite - they reduce the net income. 

If one qualifies for any of the deductions in lines 244 through 256 - the net income will be reduced to end up with taxable income on line 260.




Money4life said:


> ...So what this means is that in 2013, if I don't make any voluntary contributions into my pension plan, my taxable income will not be lowered. And the contributions from my employer will not provide any relief either...


Correct for voluntary contributions but wrong for the employer contributions. As you have said earlier the employers pension contributions will generate a RPPD that reduces net income on line 207, plus a PA for line 206 (which will reduce RRSP contribution room).

Cancelling the voluntary pension contributions will reduce the RPPD & PA but since there are still pension contributions, the RPPD/PA won't be zero.

Also - should you skip the voluntary pension contributions but make contributions to your RRSP, line 208 will reduce the net income, the same as the voluntary contributions would have.




Money4life said:


> ...So really, what I should be doing is NOT make a full RRSP contribution this year because I can always carry it over ... There is no maximum allowable pension contribution limit unlike RRSP contributions...


The maximum for *both* pension & RRSP contributions is the _RRSP contribution limit_. There is no free lunch here.

It sounds like you are confusing the priviledge of being able to make voluntary contributions with "no limit". As explained earlier - both types reduce the RRSP contribution limit either directly or by taking away earned RRSP contribution amounts that become effective the following year.


One of the main differences are that you control the RRSP contributions without involving anyone at your company.




Money4life said:


> ...Yes, the pension adjustment is subtracted from my earned income to determine my deduction limit but there is more flexibility with my room if I focus on pension contributions first...


No - the PA is not subtracted from earned income. 
When the RRSP contribution room earned for the current year is calculated as a separate calculation, it is [(18% x earned income) to a maximum] minus the PA. 

Say Bob had an earned income of $50K in 2011. 
The calculation for Bob's 2011 RRSP contribution room earned would be:
[(0.18 x $50K) to a 2011 max of $22,450] - PA
= [($9K) to a max of $22,45] - PA
= $9K - PA

So if Bob has no pension, the PA is zero and on Jan 1, 2012 there will be $9K of RRSP contribution room added to whatever his available RRSP contribution room is.

If Bob has a pension with pension contributions of $4K, which generates a PA of $4K, then $9K - $4K = $5K. On Jan 1, 2012 there will be $5K of RRSP contribution room added to whatever his available RRSP contribution room is.


Cheers


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## Eclectic12 (Oct 20, 2010)

It occurred to me that my explaination is similar to the rest of the thread so here's a different way to show why I think it does not matter whether you focus on pension contributions or RRSP contributions.

In 2012, both you & your employer contributed to the DC pension. For ease of explaining, let's say that your voluntary contributions were $6K and the employers contributions were $4K. The total pension contributions would be $10K and the PA will be $10K.

For 2013, you have cancelled your contributions. So there will only be the employer's contributions of $6K, with a PA of $6K.

This means in 2013, the RPPD for line 207 is $6K so yes - the net income will be reduced less than the $10K in 2012. However, the PA is also reduced (i.e. $6K instead of $10K) so assuming your earned income is similar, you will end up with $4K *more* of RRSP contribution room, compared to 2012 (i.e. $6K PA is subtraced instead of $10K).


So the net affect of concentrating on pension instead of RRSP contributions is that:
a) the money contributed is being professionally managed, assuming you like the fund it is going into & it's costs.
b) there is less RRSP contribution room being built up for following years.
c) the pension money may be locked-in, making it more difficult to access compared to money in an RRSP.

The idea of "use the pension as it can't be carried over" only applies to being able to invest in the pension fund. The amounts skipped as pension contributions automatically become future RRSP contribution room that can be used at any time after Jan 1 of the following year.


Cheers


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## Money4life (May 17, 2012)

Wow, Eclectic12, thank you for taking to time to respond with such detailed messages. You didn't have to put this much effort but you did and I appreciate that. I think I didn't explain things 100% clearly which unfortunately led you to repeat yourself a few times. Let me try to rectify this:



Eclectic12 said:


> *The RPPD has a matching PA*, which CRA uses to reduce the RRSP contribution room earned in the same tax year and the net amount is added to the overall RRSP contribution room on Jan 1, next calendar year (i.e. 2012 tax year, 2013 is when the net amount is added).


I don't understand the bolded section. They appear to be two different amounts on my tax return summary from 2011. PA-line 206, has a total of $4,310, which are my employer's and my own contributions meanwhile RPPD-line 207, has a total of $2,109.27, which are my own contributions into the plan. 



Eclectic12 said:


> Correct for voluntary contributions but wrong for the employer contributions. As you have said earlier *the employers pension contributions will generate a RPPD that reduces net income on line 207*, plus a PA for line 206 (which will reduce RRSP contribution room).
> Cancelling the voluntary pension contributions will reduce the RPPD & PA but since there are still pension contributions,*the RPPD/PA won't be zero.*


Again, I don't see the bolded part on my tax return. Line 207 is only my pension deductions and not my employer's contributions. I've confirmed by checking my last pay stub of 2011. Indeed, both my employer and my pension contributions (PA) play a significant role with my RRSP deduction limit but I don't see how my employer's contributions reduce my net income. My understanding from looking at my tax return is that if I don't make voluntary contributions, line 207 would be $0 but line 206 would still have an amount because of my company's contributions. 



Eclectic12 said:


> The maximum for *both* pension & RRSP contributions is the _RRSP contribution limit_. There is no free lunch here.
> It sounds like you are confusing the priviledge of being able to make voluntary contributions with "no limit".


Okay...I know there isn't a limit per se but I failed at explaining this part properly. Let me try again. I know that the maximum for both pension & RRSP contributions is the RRSP contribution limit but we have the ability to "carry it over" so we don't have to use it during the tax year. So for my own investments with the TD e-series funds, I don't have to contribute during a particular year and instead, could contribute to those funds in the following year with any carried over RRSP money from previous years. For pension plans, you are allowed to contribute but it has to be during the actual year; for me, it's deductions from my pay stub. Specific pension plans deductions cannot be carried over during the next year; i.e. I can't tell my Payroll Dept that I'd prefer them not to make a 5% contribution during 2013 and instead, would rather make the contribution in 2014, meaning a 10% contribution to the plan during that year. That's what I meant. RRSP contributions into your own investments are more flexible because you can carry it over into the following year if unused but it's not so flexible with a pension plan. That's why I thought I made a mistake by not continuing my voluntary contributions.



Eclectic12 said:


> No - the PA is not subtracted from earned income.
> When the RRSP contribution room earned for the current year is calculated as a separate calculation, it is [(18% x earned income) to a maximum] minus the PA.


Whoops! Thought I added the 18% in my original message but I missed that. Yes, I definitely understand this concept.



Eclectic12 said:


> If one qualifies for any of the deductions in lines 244 through 256 - the net income will be reduced to end up with taxable income on line 260.


Hmmm...those lines appear to be non-existant on my tax return summary. Looks like I'll have to do some reading later on to understand what these lines are and if I'll be able to claim anything down the road.

thanks again!


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## Eclectic12 (Oct 20, 2010)

Money4life said:


> Wow, Eclectic12, thank you for taking to time to respond with such detailed messages. You didn't have to put this much effort but you did and I appreciate that.


No worries ... I had un-expected a couple of nights from 11pm to 4am work so it was a chance to relax (plus my stupor explains why I mindlessly repeated myself so much *grin*).




Money4life said:


> ...I don't understand the bolded section. They appear to be two different amounts on my tax return summary from 2011. PA-line 206, has a total of $4,310, which are my employer's and my own contributions meanwhile RPPD-line 207, has a total of $2,109.27, which are my own contributions into the plan....


Strange ... you are in a Defined Contribution pension right? 
I'll check my T4s and the RPPD box tomorrow, though I'm in a Defined Benefit pension, so the PA will definitely be weird.

If I get a chance, I'll ask the pension specialist at work.

The links below indicate there is a limit for the DC plan (called a money plan).
http://www.groupbenefits.ca/defined_contribution.aspx
http://www.cra-arc.gc.ca/tx/rgstrd/papspapar-fefespfer/lmts-eng.html




Money4life said:


> ... both my employer and my pension contributions (PA) play a significant role with my RRSP deduction limit but I don't see how my employer's contributions reduce my net income...


The only other way I can think of to explain this is that the employer put the contributions directly into the DC pension, without deducting any income tax (this would be consistent with the PA being larger than just your voluntary contributions). 

If this is true ... the taxes were never taken so there would be no need for a RPPD as the T4 income info already takes the "tax deferred" status of the pension contributions into account.

It will be an interesting conversation with the pension specialist ... *grin*




Money4life said:


> ... I know that the maximum for both pension & RRSP contributions is the RRSP contribution limit but we have the ability to "carry it over" so we don't have to use it during the tax year... For pension plans, you are allowed to contribute but it has to be during the actual year; ...
> 
> RRSP contributions into your own investments are more flexible because you can carry it over into the following year if unused but it's not so flexible with a pension plan.
> 
> That's why I thought I made a mistake by not continuing my voluntary contributions...


It's good that you know that the limit for both is the RRSP contribution limit.


At the same time - I'm not sure why the pension contributions being available only in the current year is seen as an issue.

Consider the fact with with voluntary pension contributions, your PA was $4K (I'm using even numbers for simplicity). Stopping the voluntary pension contributions of $2K means that the PA is going to drop, which is $4K - $2K, to be equal to $2K.

The next RRSP contribution room earned calculation is going to subtract the PA. 

So where $4K (i.e. with voluntary pension contributions) was previously subtracted, only $2K will be subtracted (i.e. no voluntary pension contributions). The net result is that your RRSP room has increased by the same $2K that you have stopped contributing to the pension.

Bottom line is that the only "loss" is the ability to put money into whatever investment the pension is making use of. Any pension contributions that are skipped become the more flexible RRSP contribution room.

Is this an issue? Only you can decide.


Some would also point out that most pensions are difficult to get money out of whereas in comparison, an RRSP is a simple matter to withdraw from, at just about any time one wants.




Money4life said:


> ... Whoops! Thought I added the 18% in my original message but I missed that. Yes, I definitely understand this concept...


Ah yes ... the typo ... no worries.




Money4life said:


> ... Hmmm...those lines appear to be non-existant on my tax return summary. Looks like I'll have to do some reading later on to understand what these lines are and if I'll be able to claim anything down the road....


They may not apply ... a few random selections are "Limited Partnership losses of other years", "Northern residents deductions" or the famous "Addtional Deductions".

Here's a link to get an Excel spreadsheet that has them listed (see the tab marked "T1 GEN-2-3-4"):
http://www.peeltech.ca/mytax/register2011.html

Then too, most libraries have at least one good tax book that can provide an overview, if not the details of the tax return lines.


Cheers


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## Money4life (May 17, 2012)

Eclectic12 said:


> No worries ... I had un-expected a couple of nights from 11pm to 4am work so it was a chance to relax (plus my stupor explains why I mindlessly repeated myself so much *grin*).


Completely understandable.



Eclectic12 said:


> Strange ... you are in a Defined Contribution pension right?
> I'll check my T4s and the RPPD box tomorrow, though I'm in a Defined Benefit pension, so the PA will definitely be weird.


Yup, DC Plan. So this remains to be the only deal breaker for me in whether it's wise to continue with voluntary contributions or not.



Eclectic12 said:


> The only other way I can think of to explain this is that the employer put the contributions directly into the DC pension, without deducting any income tax (this would be consistent with the PA being larger than just your voluntary contributions).
> 
> If this is true ... the taxes were never taken so there would be no need for a RPPD as the T4 income info already takes the "tax deferred" status of the pension contributions into account.


Hmm...good call. That could possibly be it. Obviously there's no way that I could determine this by looking at my pay statements, right? Since the employer & voluntary contributions always appeared to be evenly deducted from my pay.



Eclectic12 said:


> So where $4K (i.e. with voluntary pension contributions) was previously subtracted, only $2K will be subtracted (i.e. no voluntary pension contributions). The net result is that your RRSP room has increased by the same $2K that you have stopped contributing to the pension.
> 
> Bottom line is that the only "loss" is the ability to put money into whatever investment the pension is making use of. Any pension contributions that are skipped become the more flexible RRSP contribution room.


True, I wasn't looking at both sides of the coin. If I continued making full voluntary contributions into the pension, I could potentially not need to use all of my allowable RRSP contributions but on the flip side, if I stopped making voluntary contributions into the pension, my lower pension adjustment would increase the overall RRSP deduction limit. So you're right, I don't think there's too much of a difference here. The number one priority should probably be investment preference when you get to this point.



Eclectic12 said:


> Some would also point out that most pensions are difficult to get money out of whereas in comparison, an RRSP is a simple matter to withdraw from, at just about any time one wants.


Yes I've been told that it's near impossible to get money out of a pension plan before you retire. My hope is to never touch that money anyway until then so it shouldn't be too much of a concern.



Eclectic12 said:


> Ah yes ... the typo ... no worries.


That excuse has saved me from countless situations in the past.



Eclectic12 said:


> They may not apply ... a few random selections are "Limited Partnership losses of other years", "Northern residents deductions" or the famous "Addtional Deductions".
> 
> Here's a link to get an Excel spreadsheet that has them listed (see the tab marked "T1 GEN-2-3-4"):
> http://www.peeltech.ca/mytax/register2011.html


Thanks for all of the links as always.



Eclectic12 said:


> Then too, most libraries have at least one good tax book that can provide an overview, if not the details of the tax return lines.


Or I can just keep coming to CMF for help.


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## Money4life (May 17, 2012)

Eclectic12 said:


> The links below indicate there is a limit for the DC plan (called a money plan).
> http://www.groupbenefits.ca/defined_contribution.aspx
> http://www.cra-arc.gc.ca/tx/rgstrd/papspapar-fefespfer/lmts-eng.html


Been getting around to reading all of your links and I found this from the Group Benefits website:


GroupBenefits.ca said:


> The employer's contributions are a tax deductible expense and are not a taxable benefit to the plan member.


Wow...so we have our answer. 

So there's no way I can attempt to work-around this if I want their free contributions, which I obviously do, even if they're tax deductible.


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## Eclectic12 (Oct 20, 2010)

Money4life said:


> ...Hmm...good call. That could possibly be it. Obviously there's no way that I could determine this by looking at my pay statements, right? Since the employer & voluntary contributions always appeared to be evenly deducted from my pay.


I think the PA being the total of both is telling us that no tax was taken off for the employer's contributions. The pension specialist is back tomorrow but I looked more closely at my T4's and it's the same deal, where only my supplemental plan contributions are showing up.

Looking at the bigger picture - if the employer's contributions were paid to you and then put in the pension on your behalf are taxed but there is no RPPD, then it would seem there is double-taxation happening. There's the income tax when it is put into the pension & then a second income tax when it's withdrawn.

All the articles I've read say that pension as well as RRSPs are tax deferred, where the only income tax should be when it is withdrawn, hopefully in retirement.



Money4life said:


> > Originally Posted by GroupBenefits.ca
> > The employer's contributions are a tax deductible expense and are not a taxable benefit to the plan member.
> 
> 
> ...


Hmmm ... since neither employer or employee are paying income tax on the pension contributions, only the PA is needed. Interesting.

I'm not sure what there is to work-around. 

If the pension contributions aren't being reported as income on your tax return then there is no need to offset it with the RPPD as it has not increased the net income. From a lowering taxable income standpoint, other means such as RRSPs etc. will have to used.

Can you opt out of the DC pension? The ones I was offered only allowed opting in or out of the voluntary contributions, not the basic amounts.


I should know for sure from an expert tomorrow or worst case, in the new year.




Money4life said:


> True, I wasn't looking at both sides of the coin... So you're right, I don't think there's too much of a difference here. The number one priority should probably be investment preference when you get to this point.


The tradeoffs that I can think of are:

a) pension - specific investments, possibly reduced fees due to economy of scale (how many employees versus just you in your RRSP?), professional management, difficult to access the money in an emergency, income tax is reduced at source (i.e. don't have to wait for the tax return to be filed for a rebate of excess taxes paid).

b) RRSP - full control of investments, fees may be higher, must do own management/research, easy to access money in an emergency.

To be clear, I'm biased to the RRSP for the choice of investments plus the ease of access (knowing I won't withdraw for anything other than an extreme emergency). Everyone has different needs so the pension may be a good choice.


BTW - this is why I don't mind spending time on questions such as this. I'm learning the full details so I better understand it myself. For example, I was sure when I went to check my T4 - the RPPD would be equal to the DB contributions (mine plus employers) and that the PA would be higher than both. I was wrong for the RPPD but on the mark for the PA.


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## Money4life (May 17, 2012)

Hi Eclectic12,

Thank you so much for the reply. It looks like you were unable to contact your pension specialist before the holidays but that's OK as you provided me with a lot of information to work with. Even though I have made it seem that taxes are my main concern, that is not entirely the case. For what it is, I think my pension plan is good enough to be keeping around and continuing to at least make some contributions. You brought up a great point about whether there is some double-taxation occurring with my voluntary contributions. I don't see a way of knowing for sure by looking at my pay statements but this is definitely a question better suited for a tax expert.

thanks again.


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## Eclectic12 (Oct 20, 2010)

Money4life said:


> Hi Eclectic12,
> 
> Thank you so much for the reply. It looks like you were unable to contact your pension specialist before the holidays but that's OK as you provided me with a lot of information to work with.
> 
> Even though I have made it seem that taxes are my main concern, that is not entirely the case. For what it is, I think my pension plan is good enough to be keeping around and continuing to at least make some contributions. You brought up a great point about whether there is some double-taxation occurring with my voluntary contributions. I don't see a way of knowing for sure by looking at my pay statements but this is definitely a question better suited for a tax expert...


Happy New Year!

It will likely be next week before I follow up.

As for "double-taxation" for voluntary pension contribution - I'm reasonably sure this isn't happening. I looked at my T4 for box 20, added up my voluntary pension calculations and reviewed tax return plus NOA. Since my voluntary pension contributions = RPPD, where this is subtraced from income - this means the only place income tax is being applied to my voluntary pension contributions is when it is withdrawn.

If you want to check your T4 & returns, as long as the voluntary contributions is the same as the T4 box 20 and was reported on line 207 of your tax return - there's no income tax paid in the year it was contributed to the pension.


The reason I'm talking to the expert at work is that the employer's contributions as not as easy to follow.


Cheers

If you look at your voluntary contributions and


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## Money4life (May 17, 2012)

Eclectic12 said:


> If you want to check your T4 & returns, as long as the voluntary contributions is the same as the T4 box 20 and was reported on line 207 of your tax return - there's no income tax paid in the year it was contributed to the pension.


Checked and a match.


Eclectic12 said:


> The reason I'm talking to the expert at work is that the employer's contributions as not as easy to follow.


Right. Thanks for the help. Very appreciated.


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## Money4life (May 17, 2012)

Morning,

I'm back to talk to you guys about my pension plan. Exciting stuff.

To those who don't want to read the thread again, basically I was contemplating not contributing to my pension plan at work and instead, making full contributions to my personal RRSPs (since the company gives me 5% regardless if I contribute). The company originally didn't give me much information about the pension plan besides the fact that it is a DC Plan. After inquiring, I know a little more about the locked-in plan. One major pro is that it has a MER of 0.37%. The disadvantages though is that we are not allowed to choose which funds we want in the plan and we are only allowed to make contribution changes twice a year. Another major disadvantage is that we can't actually see how the fund is doing--there is no online access and we are only given a single page report once per year...and that is mailed to us. The report includes total contributions and the "interest rate" during the year.

According to my pension specialist, the investment mix must be maintained within established minimum and maximums ranges:

Canadian Equities - must be between 25% to 45% of all total funds
Global Equities - must be between 15% to 35% of all total funds
Fixed Income - must be between 30% to 50% of all total funds

As at September 30, 2012, the fund was invested as follows: 

Canadian Equities - 28.2%
Global Equities - 32.8%
Fixed Income - 35.1%
Cash and Short Term - 3.9%

Soon, I'm going to ask my pension specialist if she can provide me the investment allocations as of December 31st, 2012. My concern with this investment mix is that it might be a little too safe because it's trying to be a balanced fund for all employees in my plan. Since I'm only 26 years old, I'd prefer my money to be in more ownership investments as opposed to fixed income. My current personal RRSP investments are tied to TD e-series mutual funds (my RRSP is 100% in US and International Equity) while my TFSA is about 70% Canadian Equity and 30% Bonds).

My fiance on the other hand, who also works for the same company as me, is non-unionized so she gets a little more "perks" than me. She is allowed to choose up to 22 different investment funds for her DC Plan. This includes one that is a 'Retirement Date 2050 Fund' that has asset allocations of 46.90% Canadian Equity, 19.92% US Equity, 15.69% International Equity, 12.07% Fixed Income, 3.29% Real Estate and 2.13% Mortgage. I wouldn't be complaining if I had that fund for a DC Plan. On the contrary, there's a 'Retirement Date 2015 Fund' that has asset allocations of 49.52% Fixed Income, 22.33% Canadian Equity, 9.88% Mortgage, 9.37% US Equity, 6.87% International Equity and 2.03% Real Estate. 

The closest resembling fund in my fiance's plan that mirrors my current DC plan would be the 'Retirement Date 2025 Fund'. This re-inforces my belief that my DC Plan is more geared towards someone in their 40s or 50s. With that said, now that I have provided a little more information, should I keep contributing into my current DC Plan or should I put more focus into my TD e-series funds where I can put money into where I want exactly? 

Any advise is good advise. Thanks so much!


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