What is it?
An RPP is set up by an employer to provide retirement income to employees. The plan is registered with the Canada Revenue Agency (CRA) to provide tax advantages. Contributions made to an RPP are tax-deductible within certain limits. Investment income isn’t taxed until it’s paid out of the plan.
How does it work?
The employer is required to contribute to an RPP and the employees may or may not be required to contribute. There are two types of RPPs: defined contribution and defined benefit.
The employee and/or the employer make contributions on the employee’s behalf—usually a percentage of the employee’s current income. The limit is 18 per cent of the employee’s current annual income subject to a dollar maximum. This limit applies to contributions made by both the employee and/or employer. Retirement income from the plan is based on the total value of the accumulated contributions and the investment income earned by the time the employee retires. The value of the plan will vary, depending on market performance and the selected investments.
A defined benefit plan guarantees the employee a specific income at retirement. This income is determined by a formula, which is usually based on years of service and earnings.
Employees may be required to contribute a percentage of their earnings to a defined benefit plan. The employer must contribute any additional amounts required to provide the promised benefits. Most provinces have legislation in place that prohibits employees from paying for more than half of their own benefits.