Defined Contribution Plans

Yes. Some employers contribute a portion of company profits into individual retirement accounts. How much they contribute each year depends on how much profit (if any) the company had. Some government rules for deferred profit-sharing plans differ from other defined contribution plans. For one thing, only employers can contribute to deferred profit-sharing plans.

Yes, both are types of defined contribution plans. Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) were originally set up for people who didn’t have a retirement plan available through work. The federal government now permits employers to set up group versions of these plans for workers. Like defined contribution plans:

• Each worker must have their own separate RRSP or TFSA account.
• You and/or your employer may be allowed to make contributions.
• Money put into an RRSP or TFSA grows tax-free.
• There are contribution limits to these plans.

There are some ways, however, that these plans are different from defined contribution pension plans. For example, the federal government requires ALL contributions to RRSPs and TFSAs be vested immediately—contributions made by your employer as well as you. Here are some other differences.

With a group RRSP, money paid into your RRSP by your employer is subject to income and payroll taxes. At yearend, you receive a tax receipt from your RRSP provider that includes your employer’s contribution. As a result, income taxes are deferred until you withdraw money from your RRSP.

• You can withdraw all of the money in your RRSP at any time. Some group plans, however, limit your ability to withdraw while you continue working for your employer. When you do withdraw your money, you will then have to pay income tax on all of it (including investment income).
• As with defined contribution plans, funds in an RRSP must be withdrawn or transferred by December 31 of the year you turn age 71. You can take the money as cash, transfer the money to a Registered Retirement Income Fund (RRIF) or purchase an annuity to spread out the money and its taxability over your retirement.

In an individual RRSP or if your group RRSP allows, you can contribute part or all of your tax-deductible contributions to your spouse’s RRSP. Such savings now belong to your spouse and on withdrawal would be subject to income taxes on your spouse’s income. If your spouse earns less than you, the income tax payable on this money would be less than if you received the money.

With TFSAs, you must pay income taxes on all money put into the account. Because no tax-deductibility exists for TFSAs, you can set up plans for your spouse, children and/or grandchildren if they do not already have one, or you can contribute to their existing plan(s). Such contributions would then belong to them, the accountholder. Any investment income earned in TFSAs is not taxable.

In all provinces except Quebec, no. No law requires an employer to give workers a defined contribution plan. However, some employers are required by a collective bargaining agreement with a union to contribute to a plan for their union workers.

In Quebec, a plan called a Voluntary Retirement Savings Plan (VRSP) has been created. Employers that do not otherwise provide a retirement savings plan for their workers must set up a VRSP.

• Employers who have at least 5 employees on December 31 of a year AND at least 10 employees by June 30 of the following year are required to offer a VRSP by December 31 of the same year.
• As of the date to be determined by the government, an employer with 5 to 9 employees on December 31 of a given year will have to offer a VRSP as of December 31 of the following year, at the latest.

Workers will be automatically enrolled in the plan, but can opt out. Employers can make contributions into their workers’ accounts but do not have to.

There are several good reasons to have a defined contribution plan.

• You can have money regularly deducted from your pay, making it easier to save more.
• By saving in a defined contribution plan, you can defer income taxes until a later date (like retirement) when your income and taxes will be lower.
• You’ll probably be allowed to make choices as to how your money is invested. In a group plan, the cost of these investments is lower than if you save on your own.
• You’ll be able to take most (if not all) of the money saved with you when you change jobs.
• Many employers help workers save for retirement by putting money in these accounts for them.

With a defined contribution plan, you and/or your employer put money into an account set up just for you. The amount put into the account, how the money is invested and fees paid determine how much you’ll have when you retire. With many defined contribution plans, you’re responsible for deciding how much you’ll put into your plan and how it will be invested. Investment returns, the amount of money you withdraw and when, and how long you live will all impact how long your money will last.

In contrast, defined benefit plans promise you regular payments for life based on factors like your age, pay and years of service. Plan officials are responsible for making sure you receive what you’re promised. You don’t have to worry about whether this income will stop being paid or how it is invested. The people overseeing your plan do this for you.

It depends. Some plans make you wait for a certain amount of time, while others let you start contributing right away.

• Typically, full-time employees must be allowed to join their group Registered Retirement Savings Plan after completing two years of continuous employment.
• Laws generally require that part-time employees be permitted to join a plan after completing two consecutive calendar years of employment during which the worker has earned at least 35% of the Year’s Maximum Pensionable Earnings (YMPE) in each of those years.

Check your plan booklet to learn what the rules are for your plan. You can also ask your benefits/HR department, fund office or third party administrator about your plan’s eligibility requirements.

The money you contribute to your account and the interest earned on this money is always yours. However, you may not have a right to your employer’s contributions and the interest on these contributions until a certain amount of time has passed. This is called a vesting period.

Be aware—vesting doesn’t mean you can actually take your money out of your retirement account. Most defined contribution accounts are locked-in until a specific event occurs.

Money in your RRSP or TFSA is always yours regardless of who made the contributions.

Vesting is a schedule that spells out when you’re entitled to all of the money in your account. Any money you contribute from your paycheque is always yours—it is immediately vested. Most plans also give you the immediate right to 100% of your employer’s contributions. There are some plans that make workers wait to be fully vested. The waiting period is generally not more than two years. Check your plan booklet or ask your benefits/HR department, fund office or third party administrator about your plan’s vesting requirements.

Keep in mind, just because the money is yours doesn’t mean you can take it out of your account. Your money may be locked-in.

Ask your benefits/HR department, fund office or third party administrator whether they have a worksheet or other tools that can help you decide how much money you’ll need and how much you should save to reach your retirement goals. Here are two worksheets to get you started. Important things to consider are:

• Your health before and after retirement
• When you want to retire
• Any income you will have from a pension, government retirement programs and other sources (for example, rent from property you own)
• Whether you plan to work full- or part-time after retirement
• Whether you have a spouse, a child or others who will depend on your retirement income
• Where you want to live after retirement
• What you want to do after retirement
• How long your retirement might last.

If you don’t earn a lot of money and expect to have a low income throughout your life, it may be better to use your income for your current living expenses than putting your money in a defined contribution retirement savings plan. Savings in a TFSA can be withdrawn at any time and, because investment income is not taxed, this may be a choice. If your income rises, such money could be used at a later date as contributions to an RRSP reducing your income tax in those years. The retirement payments you receive from government retirement programs such as the Canada Pension Plan/Quebec Pension Plan (C/QPP) and Old Age Security (OAS)/Guaranteed Income Supplement (GIS) may be enough to replace most of the income you got from working.

If you earn more or expect to earn more later, the amount you should put into your plan depends on how much money you think you’ll spend when you retire, how early you start saving, how much your employer contributes to your plan, investment returns and your other sources of retirement income.

• If you’re in your early 20s, a good rule of thumb is to save 10% to 15% of your income.
• If you’ve delayed saving for retirement, you’ll probably have to save more. This chart estimates how much you’ll have to save each year to replace different percentages of your income after age 65. The numbers assume a generous 5% pay increase and a return on your savings of 7% each year. Recently, inflation has ranged from 1-3%.



​Age When You Start Saving for Retirement	​Percentage of Pay You Need to Save for a Percentage of Your Current Income in Retirement
	​70% of Current Income	80% of Current Income	​90% of Current Income	​100% of Current Income
​25	9.4%	10.7%	​12.1%	​13.4%
​35	​13.3%	15.2%	​17.1%	​19.0%
​45	​20.4%	​23.3%	​26.2%	​29.1%
​55	​39.6%	​45.3%	​50.9%	​56.6%

• If you think there will be years when you won’t be paid because you’re raising children or caring for a parent, you may want to save an extra 5% or 10% of your income each year you work.
• If you’re a woman, you may want to save a little bit more. Women tend to live longer than men; this means your money may have to last longer in retirement.

The federal government keeps a record of how much you have contributed to the Canada Pension Plan/Quebec Pension Plan (C/QPP) and estimates what your monthly payment benefit would be if you and/or your family were eligible to receive it now. You can get your CPP or QPP information online.

Canadian citizens who have lived in Canada for at least 10 years after reaching age 18 are also eligible for payments from the Old Age Security (OAS) program. How much you receive from OAS depends on how long you have been a resident. The federal government provides Guaranteed Income Supplements (GIS) based on your income and marital status. Federal government web pages list OAS/GIS benefits available today. Provincial governments may also provide income supplements.

It’s best if you start saving for retirement as soon as possible—your early 20s is ideal. If you start saving early, the “magic of compounding” makes it possible for you to start small and grow. The money you put into a retirement account earns interest and other returns that increase the amount of money in your account. As the money in your account grows, you earn money on an even bigger pool of money. Here are two examples of how compounding and saving early could affect what you put aside for your retirement.

• For every six years you wait before getting started, you’ll have to roughly double the amount you save each year.
• To get the same amount of money at retirement, you can contribute $2,000 each year for the next nine years OR wait nine years and contribute $2,000 for the next 41 years!

The Canadian government limits the amount you can put into your account each year. This amount depends in part on how much you earn.

The maximum amount you can put into any combination of Registered Pension Plans (RPPs), Registered Retirement Savings Plans (RRSPs), Deferred Profit-Sharing Plans (DPSPs), Specific Pension Plans (SPPs) and Pooled Registered Pension Plans (PRPPs) is:

• A specified dollar amount that changes every year due to inflation, or
• 18% of your prior year’s annual pay—whichever amount is less.

Note: Your defined contribution plan is considered an RPP.

Because of the valuable tax breaks, it makes sense to put the maximum amount in your account each year. If that isn’t possible, try to contribute at least enough to get any matching contributions from your employer. Your plan booklet, benefits/HR/fund office staff or third party administrator can tell you how much you must contribute to get this “free” money.

Later, if you have more money to set aside for retirement, you may be able to make catch-up contributions to a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) with limits set by the federal government.

There is no law that requires you to contribute to your defined contribution plan. However, some plans set up by employers and/or unions require workers to be plan members so all workers have some money saved for retirement. When you decide whether or not to contribute, consider your income.

If you have a low income and expect to have a low income throughout your life, it may be better to use your money for your current living expenses. Retirement money you receive from the Canada Pension Plan/Quebec Pension Plan (C/QPP) and Old Age Security (OAS)/Guaranteed Income Supplement (GIS) may be enough to replace most of the income you got when working.

If you earn more, it is generally a good idea to contribute. In fact, did you know you could actually lose money if you don’t make contributions?

• The money you put into a defined contribution retirement account will reduce your taxes in the year you contribute.
• As long as your money stays in the plan, you don't pay tax on any interest or other investment returns. This means your money will grow faster than if you had to use some of your earnings each year to pay taxes.
• When workers put money into their individual accounts, some employers contribute extra money to the same accounts. If your employer provides a matching contribution based on the money you set aside, you won’t get that extra money unless you contribute to your plan.

Contribution decisions depend in part on who sponsors your plan. If your plan is set up by one employer—a single employer plan—these decisions are made by (1) the employer or (2) negotiations between the employer and a union.

If you have a multi-employer plan that permits many employers in the same trade or industry to contribute to the same retirement plan for their workers, a collective bargaining agreement and other legal documents state how much your employer must contribute to the plan, if anything.

At retirement, what happens to your money depends on the rules of your plan and what is allowed by the government. Assuming your money is vested, the options you’ll be given may be:

• Leave it where it is. If you were able to decide how your money was invested before you retired, you’ll be able to continue making these decisions after you retire.
• Roll it over. If you are a member of another pension plan, you can move your money to that plan if the other plan agrees to accept the money from your defined contribution account.
• Transfer it to a locked-in RRSP or LIRA. Locked-in Registered Retirement Savings Plans (RRSPs) are sometimes referred to as Locked-In Retirement Accounts (LIRAs). With these accounts, you can continue to make decisions about how your money will be invested or ask a professional to manage your money for you. Take note that if you transfer your money to an RRSP/LIRA, you must close the account by the end of the year you reach age 71. At that time, you can move your funds to a Life Income Fund (LIF) or a Locked-In Retirement Income Fund (LRIF).
• Transfer it to an LIF or LRIF. If you are age 55 or older, you may be allowed to move your money to a Life Income Fund (LIF) or a Locked-in Retirement Income Fund (LRIF). With LIFs and LRIFs, there are provincial rules that set minimums and maximums on how much you can take out each year based on your age. Some—but not all—of these accounts require you to purchase an annuity by the end of the year you reach age 80. Like with RRSPs, LIRAs and most defined contribution plans, you can continue to control how the money in a LIF/LRIF is invested. In some provinces, some money transferred to a LRIF/LIF may be unlocked in the first 30 days of the transfer. This money could then be paid into an RRSP which would defer taxes to a later date, or could be taken in cash.
• Purchase an annuity. You can also use your money to purchase a deferred or immediate life annuity from an insurance company that promises to pay you a regular income throughout retirement.

With all of these options, you avoid paying federal income tax until you actually withdraw the money or start receiving annuity payments.

When choosing between your defined contribution account and a Registered Retirement Savings Plan (RRSP) or Life Income Fund (LIF), you may want to consider:

• Whether you can make investment decisions. With an RRSP or LIF, you may have more investment choices available to you if you want to make these decisions on your own.
• Fees. Even though defined contribution accounts typically have mutual funds in them, the fees for these funds may be less than if you purchased them yourself. The sponsor of your plan may have negotiated lower fees than what you might be able to get as an individual investor.
• Withdrawal flexibility. The rules that govern your withdrawals may be more flexible with one option versus the others.

Some defined contribution plans are sponsored by a union/labour organization with many employers contributing to the same plan. These are called multi-employer plans. If you get a job with another employer that contributes to the same multi-employer plan, you and your employer will be able to continue contributing and you will continue earning benefits the same as if you were with your original employer. If you get a job on a project in another city or region, working for an employer that doesn’t contribute to your plan but instead to a different plan, you may be able to continue earning benefits in your original plan under a reciprocity agreement.

Have you worked instead for an employer with its own plan (a single-employer plan)? If you change jobs, you get to keep any money you’ve put into your defined contribution plan. Whether you get to keep any money your employer contributed into your account depends on whether you’re vested.

• If you’re fully vested, the employer’s money is yours.
• If you aren’t fully vested, you give up (forfeit) the portion of your employer’s money that was not vested.

Having a right to your money, however, does not mean you can just do anything you want with your money. Your money may be locked-in, which means you can only do one of the following:

• Leave it where it is. Even though you’re no longer receiving money from your old employer, you may be able to keep your account with their plan, making use of their system and investment choices.
• Roll it over into your new employer’s plan. With this option, you ask your old plan to transfer (roll over) your money to a retirement account sponsored by your new employer. This assumes your new plan is willing to accept the money on your behalf. Check with your new benefits/HR department, fund office or third party administrator to see if you can transfer money into their plan.
• Purchase an annuity. You can purchase a deferred or immediate life annuity from an insurance company that promises to pay you a regular income throughout retirement.
• Transfer it to a locked-in RRSP or LIRA. Locked-in Registered Retirement Savings Plans (RRSPs) are sometimes referred to as Locked-In Retirement Accounts (LIRAs). With these accounts, you can continue to make decisions about how your money will be invested or ask a professional to manage your money for you. Take note that if you transfer your money to an RRSP/LIRA, you must close the account by the end of the year you reach age 71. At that time, you can move your funds to another pension plan, a LIF or a LRIF.
• Transfer it to a LIF or LRIF. If you are age 55 or older, you may be allowed to move your money to a Life Income Fund (LIF) or Locked-in Retirement Income Fund (LRIF). With LIFs and LRIFs, there are provincial rules that set minimums and maximums on how much you can take out each year based on your age. Some—but not all—of these accounts require you to purchase an annuity by the end of the year you reach age 80. Like with RRSPs, LIRAs and most defined contribution plans, you can continue to control how the money in a LIF/LRIF is invested. In some provinces, some money transferred to a LRIF/LIF may be unlocked in the first 30 days of the transfer. This money could then be paid into an RRSP which would defer taxes to a later date, or could be taken in cash.

There are typically time restrictions and other rules that must be followed when transferring retirement money. Check your plan booklet or talk to your plan administrator for the rules that apply to your plan when you leave your job. If your money is not locked-in, you can cash it out, but this is usually a bad idea.

If time taken for this reason is an approved leave of absence, the time taken does not count against you. You’ll vest in the same amount of time as if you hadn’t take the leave.

If you’d like to stop contributing to the plan, ask your benefits/HR department, fund office or third party administrator what you need to do to make changes. If you owe money to people or businesses, money in your defined contribution (money purchase) account is generally safe from their claims. This may not be the case for money in other retirement accounts. While funds that have been deposited in a Registered Retirement Savings Plan (RRSP) for at least 12 months are safe, funds in other types of defined contribution plans like profit-sharing plans and Tax-Free Savings Accounts (TFSAs) are rarely protected.

What happens if you become disabled before you retire can vary greatly from one employer to another. Much depends on the extent of your disability, how long it lasts and whether your employer has provided disability protection through an insurance company.

If your employer provides long-term disability (LTD) coverage, you will probably draw benefits from it. You and your employer may continue to contribute to your plan. When you reach your plan’s normal retirement age (usually age 65), your LTD payments will stop and you will start using the money in your defined contribution account.

If there is no LTD insurance covering you and you have no earned income, neither you nor your employer can put money into your defined contribution account. Federal law restricts contributions to a portion of your income.

At your death, a plan typically considers you to be fully vested and all the money in your account is available to your spouse, another beneficiary or your estate. This money may be paid in cash or used to provide pension benefits to your spouse, or your spouse may be able to transfer the funds to his or her own defined contribution plan. Ask your benefits/HR department, fund office or third party administrator to explain your plan’s rules.