Do you have an employer-sponsored pension plan? If your employer has a Defined-Benefit Pension Plan (DBPP) or a Defined-Contribution Pension Plan (DCPP), and you’re planning on retiring soon, you may be wondering how contributions affect your RRSP deduction limit.
Your registered retirement savings plan (RRSP) deduction limit, often referred to as your “contribution room” or “contribution limit” is the amount that you can contribute to your RRSP and PRPP (in addition to your employer’s contributions) in order to reduce your tax for that year.
In general, the RRSP contribution room is calculated based on your income earned from January 1 to December 31 of the previous year. This calculation will be made automatically if your employer participates in EFILE. Your contribution limit is then calculated by the CRA and reported to you annually on your Notice of Assessment you receive after filing your income tax return.
Like RRSPs, contributions and investment earnings through a Registered Pension Plan (RPP) are exempt from taxes until the benefits are paid out upon retirement.
While the amount you withdraw from your RPP is taxable income, your retirement income is likely lower than what you were making while employed, and that lower tax level during retirement provides you with tax savings.
Your RRSP contribution limit is reduced by the pension adjustment. The pension adjustment is calculated by your employer and reported to the CRA on your T4 each year.
We’ve covered the types of Registered Pension Plans many times on our blog, but to summarize:
- Defined-Benefit Plans guarantee a specific retirement income payout when the pension matures.
- Defined-Contribution Plans don’t guarantee what your retirement income will be until the moment the pension pays out. It only guarantees how funds are contributed to the pension (such as employer contributions and matching funds). Once paid out, you manage the funds yourself or through a financial institution.
A defined benefit pension plan will have a significant impact on your available RRSP room. Your RRSP contribution limit is reduced by the pension adjustment. The pension adjustment is calculated by your employer and reported to the CRA on your T4 each year. If you are a member of a defined benefit pension plan, the value of the RRSP room generated by your employer’s contributions to the plan will be included in your income when you file your tax return.
If you have a defined contribution pension plan and also an RRSP, or other registered plans, you must report the pension adjustment on your T4 slip. The pension adjustment reported on the T4 will reduce your amount of RRSP deduction room available on your T1 General form. The pension adjustment can be reported as either a pension adjustment or as a deduction.
The team at Pension Solutions Canada specializes in helping you prepare for retirement and protect your assets. Unsure about how your pension contributions affect your RRSP? We can help! Call us at 1-888-554-6661 to get started. Our services are no cost to you.