Registered pension plans (RPPs) are employer-sponsored retirement savings plans. They provide a structured way to save for retirement, with funds invested and growing tax-deferred until retirement.
Employees and employers can both make RPP contributions. In fact, employers often match contributions, helping to boost the plan holder's long-term savings.
Understanding how RPP contributions work is essential for maximizing retirement benefits. Here, you'll find information regarding RPP contribution limits, tax implications, and more.
Key Takeaways
- RPPs are employer-sponsored plans where both employees and employers contribute.
- Employer contributions generally range between 5% and 10% of an employee’s salary.
- Contributions are tax-deductible, reducing taxable income and allowing for tax-deferred growth.
- The Canada Revenue Agency (CRA) sets annual RPP contribution limits based on earnings.
- Changing employers may require transferring RPP funds to a locked-in retirement account (LIRA) or a new employer’s plan.
What is a registered pension plan (RPP)?
An RPP is a retirement savings plan set up by an employer to provide retirement income for employees. The plan is registered with the Canada Revenue Agency (CRA), ensuring that contributions and growth within the plan receive favourable tax treatment.
Contributions can be made by the employer, the employee, or both, depending on the plan’s structure.
RPPs generally fall into two categories:
- Defined benefit (DB) plans: These plans promise a set amount of income in retirement, based on things like your salary and how long you’ve worked there. The employer handles the investing and makes sure there’s enough money to pay you later.
- Defined contribution (DC) plans: These plans build up retirement savings from contributions by you and your employer, plus any investment growth. How much you end up with depends on how the investments do, so the risk is on you.
By participating in an RPP, employees benefit from structured retirement savings with tax advantages and potential employer-matching contributions that increase overall retirement income.
How much do employers contribute to RPPs?
Employer contributions to RPPs vary depending on the company's policies and the type of plan chosen. In most cases, employers contribute a percentage of the employee’s salary, either as a fixed amount or by matching the employee’s contributions.
Defined benefit (DB) plans:
- Employers have to put enough money into these plans to make sure there’s enough to pay out in the future
- Experts regularly check the numbers to figure out how much needs to be contributed to keep the plan healthy.
- Employers may contribute between 5% and 12% of an employee’s salary to keep the plan properly funded.
Defined contribution (DC) plans:
- Employers often match what employees put in, usually between 5% and 10% of their salary, up to a maximum of 18%.
- Some plans give a set contribution from the employer, even if the employee doesn’t add anything.
- The employer’s money goes straight into the employee’s account and gets invested based on the employee’s chosen investment options.
Hybrid plans:
- These plans combine features of DB and DC plans, where employers put money into a guaranteed pension and also into an investment account.
Employers may also offer additional contributions as part of performance incentives or to encourage long-term participation.
How do I contribute to my RPP?
RPP contributions can be mandatory or voluntary, depending on the terms of the plan. The act of contributing is usually easy because the funds are automatically deducted from your paycheque.
Employees can contribute a set percentage of their earnings, with many plans offering flexibility in the amount contributed.
Here’s how contributions typically work:
- Contributions are deducted automatically from an employee’s gross pay.
- Employees can choose to increase their contribution percentage within the limits set by the plan.
- Some plans allow for additional voluntary contributions (AVCs) beyond the mandatory amount.
- All contributions, whether mandatory or voluntary, are tax-deductible and reduce taxable income.
If an employee participates in a defined contribution (DC) plan, they may also have the option to choose how their contributions are invested, selecting from various portfolio options offered by the plan administrator.
Registered pension plan contribution rules
RPPs have rules regarding contribution limits, mandatory participation, and withdrawal restrictions. Understanding these rules can help you make informed decisions about your retirement savings.
What is the maximum RPP contribution limit?
The CRA sets annual contribution limits for RPPs, which vary depending on the type of plan:
- Defined benefit (DB) plans: The amount you can contribute is determined with a formula called a pension adjustment (PA), which estimates the value of the pension you earned that year. The PA lowers how much room you have for RRSP contributions. In 2025, the contribution limit is $3,756.67.
- Defined contribution (DC) plans: Contributions are limited to 18% of the employee’s earned income, up to a maximum annual limit set by the CRA. For 2025, the contribution limit is $32,490.
These limits ensure that contributions remain within allowable thresholds and prevent excessive tax-deferred savings.
Is contributing to my RPP mandatory?
For most DB plans, contributing is mandatory, with a fixed percentage deducted from an employee’s pay. DC plans often allow for voluntary participation, although employer matching does a good job of enticing employees to make contributions.
When funding is required to ensure a DB plan can meet future retirement obligations, contributions are likely to become mandatory. In contrast, DC plans may offer more flexibility, allowing employees to choose their contribution level.
What are RPP withdrawal rules?
Withdrawals from an RPP are generally not allowed before retirement. However, certain situations may permit the transfer of funds:
- Termination of employment: Funds can be transferred to a locked-in retirement account (LIRA), a new employer’s RPP, or used to purchase an annuity.
- Retirement: Funds can be converted into a pension, transferred to a registered retirement income fund (RRIF), or used to purchase an annuity.
Withdrawals before retirement may be subject to restrictions and penalties, depending on the terms of the plan.
What happens to my RPP if I change employers?
When changing employers, RPP contributions may need to be transferred to another registered plan. These are some options:
- Transferring to a new employer’s RPP: Of course, this is only an option if your new employer offers a compatible plan.
- Moving funds to a locked-in retirement account (LIRA): This option maintains the tax-deferred status of the funds.
- Purchasing an annuity: Provides guaranteed income in retirement.
- Defer the pension: Leave the RPP where it is and receive it once you retire.
Employees should review their plan’s rules and seek advice to determine the best option for their circumstances.
What are the tax implications of my RPP?
RPPs offer several tax advantages that can significantly benefit employees:
- Tax-deductible contributions: Employee contributions reduce taxable income, lowering the amount of tax owed.
- Employer contributions: Employer contributions aren't included in the employee’s taxable income, providing additional tax-free growth.
- Tax-deferred growth: Investment income within the RPP grows tax-deferred, meaning taxes are only paid when funds are withdrawn.
- Taxable withdrawals: Withdrawals during retirement are taxed as regular income, potentially at a lower tax rate if the retiree’s income is reduced.
Understanding these tax implications helps employees plan effectively and maximize their retirement savings.
FAQ
What are RPP contributions?
RPP contributions are amounts contributed by employees and by employers to a registered pension plan to save for retirement. Employee contributions are (typically) automatically deducted from their paycheque, and funds grow tax-deferred until withdrawal, usually at retirement.
Are RPP contributions tax deductible?
Yes, RPP contributions are tax-deductible. They reduce your taxable income for the year, which can lower the amount of income tax you owe. Contributions are usually made through your employer and reported on your T4 slip.
Do RPP contributions reduce taxable income?
Yes, contributions to an RPP reduce an employee’s taxable income. This means that the more an employee or employer contributes, the lower their taxable income and the less they will owe at tax time each year.
Does RPP contribution reduce RRSP room?
Yes, RPP contributions reduce your RRSP contribution room. The amount is calculated using a pension adjustment (PA) reported on your T4 slip. This ensures total tax-deferred retirement savings stay within government limits, balancing RPP and RRSP contributions for each individual.
What are RPP contributions box 20?
Box 20 on a T4 slip shows the total amount of employee contributions made to an RPP during the year. This amount is used to calculate the pension adjustment and determine the RRSP deduction limit.
Leave a comment
Comments