Author Topic: Canadian RPP vs RRSP for someone new to Canada  (Read 4481 times)

BrakeForTurtles

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Canadian RPP vs RRSP for someone new to Canada
« on: May 04, 2017, 06:36:36 PM »
I have just started a new job that gives me a significant increase in pay, and also a bunch of other nice benefits like an RPP with employer contributions. I'm a sensible saver, and the prospect of employer matched contributions up to 14% or so caught my interest, but the issue is that I am a newcomer to Canada and I don't have the RRSP room to take advantage. My RRSP room currently sits at around $4K, which I plan to easily reach myself within my first few paycheques. As far as I can understand from reading lots of very dry literature provided by the pension fund and CRA, all contributions (my 14% + my employers 14%) count towards my RRSP room. Am I reading this right? So if I earn $60K and have $16.8K in combined contributions, I will exceed my RRSP cap by a long shot. Or my pension contributions will be maxed at $2K from me and $2K from my employer.

Is it worth still signing up, but being limited to that $4K contribution for 2017 (and ~$8K in 2018)? (and who knows after that because I might not be in Canada any more)

I also don't like the idea of locking up my max RRSP contribution in something that can't be touched until I'm 55. It's the thing I love about RRSPs, that they can be accessed earlier with no penalty. So I'm leaning towards the idea of it not being worth it, because I am quite mobile and will probably be back a forth between Canada in Australia between now and 55. Having flexible, tax sheltered investments feels like more of a priority. But I am willing to hear otherwise!

RichMoose

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #1 on: May 04, 2017, 07:05:37 PM »
I have just started a new job that gives me a significant increase in pay, and also a bunch of other nice benefits like an RPP with employer contributions. I'm a sensible saver, and the prospect of employer matched contributions up to 14% or so caught my interest, but the issue is that I am a newcomer to Canada and I don't have the RRSP room to take advantage. My RRSP room currently sits at around $4K, which I plan to easily reach myself within my first few paycheques. As far as I can understand from reading lots of very dry literature provided by the pension fund and CRA, all contributions (my 14% + my employers 14%) count towards my RRSP room. Am I reading this right? So if I earn $60K and have $16.8K in combined contributions, I will exceed my RRSP cap by a long shot. Or my pension contributions will be maxed at $2K from me and $2K from my employer.

Is it worth still signing up, but being limited to that $4K contribution for 2017 (and ~$8K in 2018)? (and who knows after that because I might not be in Canada any more)

I also don't like the idea of locking up my max RRSP contribution in something that can't be touched until I'm 55. It's the thing I love about RRSPs, that they can be accessed earlier with no penalty. So I'm leaning towards the idea of it not being worth it, because I am quite mobile and will probably be back a forth between Canada in Australia between now and 55. Having flexible, tax sheltered investments feels like more of a priority. But I am willing to hear otherwise!

I'm a little confused... You have the option of joining a RPP with a 14% match, or you have the option of your employer matching 14% in your self-directed RRSP? Is the plan a Defined Contribution plan or Defined Benefit plan?

With a DB plan, your RRSP room gets adjusted at the end of the year by the calculated Pension Adjustment (different from your contributions). You would normally make your full contribution and the Pension Adjustment should not exceed your max RRSP room for the year.

With a DC plan, both your contributions and the employer's contributions count towards the pension adjustment. In this case, if you have little extra RRSP room, your matching contributions would be limited to 9%+9% up to a max of $13,005 each for 2017.

In any event, I would not be so quick to turn away a guaranteed 100% return on your investment. Also, if it's a DC plan, check to see what the process would be to move from the company's plan provider to a self-directed RRSP. Some providers allow you to do a transfer every year to a personal RRSP which would really tilt it in favour of the pension arrangement.

BrakeForTurtles

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #2 on: May 04, 2017, 07:45:39 PM »
It is a DB plan. Argh, I guess I will have to do more reading! It's really hard to make sense of the CRA and pension fund documents because they all assume fairly high RRSP room, and also a lifetime of paying into a pension plan. But the thought of turning down free money definitely makes me fret!

The fund contribution information page says:
"You contribute a percentage of your earnings into the Plan each pay period, and your employer matches your contributions dollar for dollar. The rates are 11.2% on pensionable earnings below the YMPE and 14.8% on earnings above the YMPE ($55,300 in 2017)."

So actually I would be contributing 11.2% this year, as I forgot about starting partway through the year.

Do you know a good resource for calculating the pension adjustment? I think I misinterpreted that as being the full contribution amount, but if it isn't then that's good to know!

Al1961

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #3 on: May 04, 2017, 07:48:23 PM »

Do you know a good resource for calculating the pension adjustment? I think I misinterpreted that as being the full contribution amount, but if it isn't then that's good to know!

http://www.cra-arc.gc.ca/E/pub/tg/t4084/README.html

RichMoose

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #4 on: May 04, 2017, 07:49:39 PM »
For DB plans the PA it will not exceed your RRSP limit. They intentionally design it not to.

BrakeForTurtles

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #5 on: May 04, 2017, 08:01:07 PM »
Ah, also another thing I maybe messed up is the year that the PA counts towards. If my 2017 RRSP cap is based on 2016 income (with no pension contributions) nothing will be taken out of that, right? It's my 2018 RRSP cap that will have this year's PA applied to it, and therefore reduced? That would make a lot more sense!

Thanks for being so understanding of my probably very basic questions. The first I had ever heard of or thought about a pension plan was when I was filling out my onboarding paperwork yesterday.

RichMoose

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #6 on: May 04, 2017, 08:57:20 PM »
Yes that's correct, the PA adjusts for the next year's RRSP "room"

Heckler

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #7 on: May 04, 2017, 10:04:44 PM »
A pension will likely be paid out to you in a LIRA when you leave the company - a locked in pain in the ass account. 

Go with an RSP, not a Pension if youre not in it for the long term.

http://www.finiki.org/wiki/Pension_plan

http://www.finiki.org/wiki/Locked-in_accounts


Heckler

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #8 on: May 04, 2017, 10:06:44 PM »
You might have the option to max your low RSP limit via the pension plan and let the overflow spill into a taxable account. 

FrugalToque

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #9 on: May 05, 2017, 05:43:35 AM »
This seems a bit confusing.

First, you're right: RRSPs can be withdrawn from in any year, not just "After 55" or whatever.  You treat them as income in the year you make the withdrawal, so don't retire and withdraw in the same tax year as you made contributions.  Easy peasy.

Second: your company offers 14% matching?  I've never heard of this.
RRSPs in Canada work this way:
In year X, having no previous income, you make $100k.  Your "Year X + 1" space for RRSPs is now $100 * 18% = 18k

In year X+1, you may now deduct $18k from your income, if you put it in an RRSP.  This comes off the high end, so if you salary doesn't change, you literally only have to claim the $82k you didn't stash.

If you make another $100k in Year X+1, and you don't use your $18k, you'll have $36k of room in year X+2.  If you do stash your $18k, you only claim $82k in Year X+1 and will have another $18k of space in year X+2.

So it's great, but rare, for a company to offer, "We'll match funds, dollar for dollar, up to 18% of your income", although some may word it differently "We'll match up to 9%" which means you put in 9%, they put in 9%.

But it doesn't make sense to say "You put in 14%, we'll put in 14%" because that goes to 28% every year, which will quickly go over your limit from the previous year.  It seems more likely that they mean "you put in 7%, we put in 7%".

Also, I've never worked at a company that went that high.  In it's best days, Nortel used to give $1 for $1 up to a certain limit (I don't think it went all the way to 9% for 9%) and several companies around here in Ottawa went $0.50 for every $1 the employee put in (up to a limit, something like "you put in 10%, the company contributes 5%).

Some companies, such as my last, actually locked in the money in with some provider until you left the company.  (This may be what someone referred to as a LIRA, but mine wasn't literally a LIRA).  As soon as I left that company, I moved my money from the company sponsored plan (with its high MERs) and into a Questrade account.

In your situation, I assume you received a Notice of Assessment from the CRA detailing the $4k of RRSP room you had from your previous year of employment (You earned about $22k then?)  Yes, you should arrange with your employer so together you contribute the exact amount you possibly can (The $4k you quoted)  Hopefully, the $22k was a partial year's salary and this year's full year salary will be higher?  In that case, *next* year will be when you can really use power of the RRSP deduction to do some tax deferral.

I would still sign up for the employer matching, though.   TWO THOUSAND DOLLARS is still money, right?

Toque.

Saskatchewstachian

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #10 on: May 05, 2017, 07:48:52 AM »


Second: your company offers 14% matching?  I've never heard of this.
RRSPs in Canada work this way:

..............

Just want to chime in here on the 14% as I get the same in my company. In truth I get 8% of wage into a DC plan no matter what then if I decide to put in another 1%, 2% or 3% they will match it. Obviously I am putting in 3%. So for a salary of 100k it would be:

Employer Contribution -       8%
Employee Contribution -       3%
Employer Matched -             3%
Total -                                  14%

So if I put in 3k per year my total that actually goes into the account in 14k. Pretty stellar deal.

RichMoose

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #11 on: May 05, 2017, 08:12:46 AM »
Lizl, I think you are getting some confusing advice here because of your wording in the OP.

With a DB plan, like you specified with YMPE and such, you are not getting a "company match" per se. You are contributing to a pension with a defined future benefit who's contributions are based on an actuarial estimate of benefit costs and plan returns. The Pension Adjustment is calculated by the estimated current value of future benefits that were accumulated during the calendar year. Contributions do not have a direct bearing on this calculation.

If you plan to leave the pension early there are several scenarios that apply. Before the vesting period (typically 2-5 years depending on the plan) you only get back your contributions plus interest. After it's vested, you get back the current value of the plan based on it's future benefit. Usually it's similar to all contributions plus interest, but in today's low rate environment it can be more.
The pension payout will normally be broken into two parts: a Locked portion and an "excess" portion. The locked portion is similar to the accumulated PA over the years you contributed to the plan and must be put in a LIRA. This transfer does not affect your RRSP  The excess portion gets paid out in cash and is taxed, but you can direct this to your RRSP room until that is filled up.

Also, in most circumstances, participation in a DB plan is not optional as it is negotiated in a collective agreement. Regardless I would join the plan as it's generally a decent deal for a guaranteed return. Almost like a bond so to speak.
« Last Edit: May 05, 2017, 08:14:35 AM by Mr. Rich Moose »

GreatLaker

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #12 on: May 05, 2017, 08:17:28 AM »
This sounds like a DB pension plan. Such pensions typically have a contribution formula where both the employer and employee contribute x% of income up to YMPE plus y% of income above YMPE. YMPE is Yearly Maximum Pensionable Earnings for CPP, and it is meant to reflect an average industrial wage, adjusted annually for inflation. OMERS, OPSEU, HOOPP pensions all have similar formulas. Is this the CAAT pension?

The contributions don't go into an RRSP, but they do reduce your available RRSP room for the following year according to the PA. (the link Al1961posted) Here is a simpler explanation of the PA: http://www.advisor.ca/retirement/retirement-news/area-52-know-your-pension-adjustments-45085

If you leave your employer you would likely have a choice of leaving the money in the pension and collecting a monthly pension when you reach retirement age, or taking the lump sum value and putting it into a Locked In Retirement Account (LIRA), LIRAs are like RRSPs but you cannot access the money until you reach retirement age and there are both minimum and maximum annual withdrawals. Remember it is your retirement pension so you should not withdraw it before retirement. You may also have the opportunity to transfer it to another pension if you change jobs to a new employer with similar DB Pension.

Also is the pension benefit indexed to inflation? Many union and public service pensions are indexed and very well funded. If so you pension will be guaranteed for life, indexed or partially indexed, and probably with some type of spousal survivor benefit. There are very few private sector pensions like that any more.

For contrast, I worked for a company that had a non-indexed pension that was constantly underfunded and the company had very weak finances and it ended up being purchased by a US company that does not look like it has much commitment to Canada. So I took the commuted value, and basically have to provide my own pension.

If you are a skilled experienced investor you could consider opting out (if that is an option). But good DB pensions are rare and valuable these days, especially if they are indexed and well funded.

Hope this helps.
« Last Edit: May 06, 2017, 06:20:01 PM by GreatLaker »

FrugalToque

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #13 on: May 05, 2017, 08:26:27 AM »
Second: your company offers 14% matching?  I've never heard of this.
RRSPs in Canada work this way:

Just want to chime in here on the 14% as I get the same in my company. In truth I get 8% of wage into a DC plan no matter what then if I decide to put in another 1%, 2% or 3% they will match it. Obviously I am putting in 3%. So for a salary of 100k it would be:

Employer Contribution -       8%
Employee Contribution -       3%
Employer Matched -             3%
Total -                                  14%

So if I put in 3k per year my total that actually goes into the account in 14k. Pretty stellar deal.
That is pretty sweet.  I've never had an employer that put any money in unless I put some in.  I've been matched at 50% and at 25%, but that's it.

Good for you, finding work like that and then (naturally) maxing out the match as well.

Toque.

GreatLaker

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #14 on: May 05, 2017, 08:29:12 AM »
If you plan to leave the pension early there are several scenarios that apply. Before the vesting period (typically 2-5 years depending on the plan) you only get back your contributions plus interest. After it's vested, you get back the current value of the plan based on it's future benefit. Usually it's similar to all contributions plus interest, but in today's low rate environment it can be more.
LizI's profile says location is Ontario. Since 2012 all pension contributions in Ontario have immediate vesting.
https://www.fsco.gov.on.ca/en/pensions/legislative/Pages/Immediatevesting.aspx

Quote
Also, in most circumstances, participation in a DB plan is not optional as it is negotiated in a collective agreement. Regardless I would join the plan as it's generally a decent deal for a guaranteed return. Almost like a bond so to speak.
Well said. DB pension = guaranteed future income, maybe even indexed. DC pension or RRSP = do it yourself; maybe do really well, but maybe not resulting in money worries.

BrakeForTurtles

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #15 on: May 05, 2017, 03:20:57 PM »
Wow, thank you so much everyone! As you can tell being completely new to the Canadian system of retirement investing has made this confusing for me! Thankfully I can buy back time from the start of my contract, so waiting until I understand it all doesn't affect the amount contributed.

If it helps at all, the plan in question is the CAAT pension plan. I know in Australia tertiary education institutions tend to have prettty good conditions for staff so I'm assuming it's similar here and that it is a good plan. But maybe I'm misreading the part about employer contributions? The information provided says "You contribute a percentage of your earnings into the Plan each pay period, and your employer matches your contributions dollar for dollar." It's 11.2% up to the YMPE and 14.8% above that. So my ~40K for 2017 (a partial year) should mean $4480 contributed from my earnings (and knocked off the top for tax purposes) and $4480 from my employer. Is that right?

As for vesting etc, once I finish working for this employer I remain a member of the plan for 2 years (during which time I can transfer to another pension plan if I start a new job). After two years I can either defer the pension until retirement age, or take the lump sum in a LIRA. Which I just noticed I can also run through Questrade, so at least that part is easy.

To answer various other questions:
- the pension benefit is indexed to inflation
- FrugalToque: I had a much lower paying job last year (nice to get a 50% pay hike just by changing jobs!), and I have also starting contributing to my RRSP. So initially I had $5580 but I put in around $1300 so I was just listing the $4K as the remaining room. Thank you for your breakdown of how the years work, that helps a lot!

GreatLaker

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #16 on: May 05, 2017, 07:36:24 PM »
But maybe I'm misreading the part about employer contributions? The information provided says "You contribute a percentage of your earnings into the Plan each pay period, and your employer matches your contributions dollar for dollar." It's 11.2% up to the YMPE and 14.8% above that. So my ~40K for 2017 (a partial year) should mean $4480 contributed from my earnings (and knocked off the top for tax purposes) and $4480 from my employer. Is that right?

That sounds correct. Basically you and your employer contribute the same amount to your pension each year based on salary, and you get a tax deduction for your contributions.

Both contributions result in a Pension Adjustment (PA) which will reduce your 2018 RRSP room. The purpose of the PA is to ensure that people with and without pensions have approximately the same amount of tax-deferred savings room.

When your 2016 tax return is assessed you will get (maybe already got) a Notice of Assessment that will also state what your 2017 RRSP room and Pension Adjustment are. You can sign up for online access to your CRA account:
http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html

You may already know but Canada also has government pensions. Canada Pension Plan (CPP) is based on your years working in Canada and income. Your employer will deduct 4.95% of your income up to $2564/yr, and they will match that amount as CPP contributions. CPP normal start age is 65 but can be taken at 60 or deferred to 70. Old Age Security (OAS) is based on years of residency in Canada, and is paid out of general tax revenues so you won't have any direct contribution to it. OAS normally starts at age 65 but may be deferred to 70. Both pensions are payable to you whether you remain a Canadian resident or move out of the country (for OAS it will be prorated as long as you lived in Canada for at least 10 years after age 18). There is also Guaranteed Income Supplement (GIS) but it is for low income seniors and only payable to Canadian residents.
http://www.taxtips.ca/seniors.htm
https://retirehappy.ca/understanding-government-benefits/

You might not be thinking much about retirement now, but nice to know the benefits are there even if you don't think about them.  :)

BrakeForTurtles

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #17 on: May 06, 2017, 10:36:20 AM »
Excellent, thanks so much for that GreatLaker. When I first started working and noticed the CPP deductions I was annoyed, thinking they would work the same way as most other countries and I was just kissing that money goodbye. Then further research revealed I'd be eligible for a Canadian pension no matter where I am in the world. Pretty handy to have, but I also wonder if the system is sustainable enough that it will still be in place in 2051. I have a feeling they might try to close the "random Australians claiming the pension because they worked a few winters at Whistler" loophole by then! (I will most likely be a Canadian citizen by then so I guess it's not *as* applicable to me)

Ok, so I will sign up for the pension plan!

Just one slightly unrelated question to open up a whole other can of worms, how do you all factor pension + CPP + OAS into your FI calculations? Does the income from 65+ make the 4% rule a little more flexible, given that you can draw down your principle a little without worrying about reducing income later in life? Or do you just see the retirement income as a bonus and sort of pretend it isn't there?

Also I have started a journal if anyone is interested in following my progress, I'm sure many valid contributions could be made by Canadians! https://forum.mrmoneymustache.com/journals/an-aussie-in-canada-newbie-to-journallinginvestingfi

Al1961

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #18 on: May 06, 2017, 10:46:54 AM »
As far as CPP goes, the latest actuarial report says that the CPP is sustainable or the next 75 without cutting benefits. Governments recently expanded it, so benefits, and contributions, will rise a bit over the course of 10 or so years....

RichMoose

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #19 on: May 06, 2017, 11:11:58 AM »
Definitely count your pension as you can always take control over it through a commuted value transfer as discussed further up this thread.

CPP is really stable so I would factor your expected benefit into the calculation. For early retirements the benefit can be really reduced as it is based on years of contributions and income (with a few exemptions). If you're retiring before 50, I wouldn't put too much weight on it. It does offer a hedge on the off chance <10% that the 4% rule has historically failed over a long retirement.

I view OAS as a pure bonus. I dont't think the program will be canned anytime soon, but I do think it will likely be changed substantially. If this basic income thing ever gets implemented, it would probably signal the end of OAS in its current form. Thats only my opinion though, politicians are notoriously fickle and illogical.

GreatLaker

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Re: Canadian RPP vs RRSP for someone new to Canada
« Reply #20 on: May 09, 2017, 05:39:16 PM »
Liz... also meant to reply to you on this and on your journal.

As others said Canada's public pension system is reportedly well funded. There's no indication it will be dramatically cut back, but it may evolve slowly with demographic and economic changes.

OAS may not be too hard for you to value. I think as long as you have 10 years residency in Canada it will be prorated on your total years of residency after age 18, up to a total of 40 years.

CPP is harder because it is based on your work years and pay. It's designed to pay 25% of your earnings up to maximum of the YMPE, but any years where you made less than YMPE, and especially zero earning years will reduce it. And retiring at 60 lowers it by 36% compared to taking it at 65. Not really easy to decipher. The RetireHappy link I posted upthread has good info.

My approach for now would be ignore it and consider it a windfall when you receive it. With your pension and TFSA savings plus company contributions you are already saving a lot. Then about 5 or 10 years before retirement do some more serious spreadsheeting or look for a fee only financial planner to run some numbers for you. By that time you will be a bike riding, beer brewing mad scientist with no money worries at all! :))