A pension plan or a group registered retirement savings plan is a way to set aside some of your current income to provide an income for your retirement. A portion of your employment income is deferred to a time when you will no longer be employed. You also defer the tax you would pay on that income. Your employer pays into your pension plan and, in some cases, to your group RRSP.
Your employer might offer one or a combination of three types of plans:
- Defined Benefit Pension Plan
- Defined Contribution Pension Plan
- Group Registered Retirement Savings Plan (Group RRSP)
If an employer offers type 1 or 2, they must also pay into them. The employer does not have to pay into type 3, but might pay the cost of administering a group RRSP.
Contribution Limits under the Income Tax Act
Contributions to defined benefit plans, defined contribution plans, deferred profit sharing plans, and RRSPs are limited by the Income Tax Act. For every dollar of employment income that you earn, you also earn 18 per cent in RRSP contribution room, up to the RRSP dollar limit. For example, if you earned $40,000 in 2015, you would have earned $7,200 in contribution room. As a member of a pension plan or a deferred profit sharing plan, your RRSP room will be reduced automatically due to a pension adjustment that is reported for each year that you accrue benefits under a plan. If you do not use up all of the RRSP room that you have earned in one year, it can be carried forward to the next year. The Income Tax Act also defines upper limits to the amounts that can be contributed to or accrued under each type of plan: Defined Contribution Limit
The money purchase limit (which is the total of employee, employer, and voluntary contributions) that can be contributed to a defined contribution plan is $25,370 in 2015. The limit is indexed according to the increase in the average industrial wage.
Defined Benefit Limit
The annual amount of pension you may accrue under a defined benefit plan is equal to 1/9 of the defined contribution limit, and is $2,818.89 per year in 2015.
If you accrue pension at a rate of 2 percent of earnings, you can only accrue pension on earnings up to $127,600.
Increases in the defined contribution limit will determine the increases to the defined benefit limit.
The maximum RRSP room that you can earn in 2015 is limited to $24,930 and will increase to $22,970 in 2012. The RRSP dollar limit is equal to the previous year's defined contribution limit. Therefore, if you make $200,000 in 2015, 18 per cent of that would be $36,000. However the RRSP contribution room you earn is capped at $24,930.
RRSP Contribution Room
Your RRSP contribution room in a year is the total of the following amounts in respect of the previous year:
- Any unused RRSP contribution room from previous years, plus 18% of your earned income up to the RRSP dollar limit, less your pension adjustment.
- If you were a member of a defined benefit plan and purchased past service, or became entitled to additional benefits in respect of a previous year or years, you will receive a past service pension adjustment. A past service pension adjustment will reduce your RRSP contribution room just like your pension adjustment.
- If you terminated your membership in a defined benefit plan and received a commuted value from the plan, you may have received a pension adjustment reversal. A pension adjustment reversal serves to restore RRSP contribution room lost when the total pension adjustments that are reported for an individual in a defined benefit plan are greater than the value of the benefits that are ultimately received from the plan. Also if you terminated membership from a deferred profit sharing plan or a defined contribution pension plan and were not fully vested at termination you would receive a pension adjustment reversal. A pension adjustment reversal is therefore added to your RRSP contribution room.