Many employers offer registered pension plans (RPP) where employees contribute a certain amount and the employer contributes an amount in relation to the amount contributed to by the employer. On the T4, employee contribution, “RPP contributions”, is recorded in box 20 and the employer contribution, “Pension Adjustment” is recorded in box 52.
RPP contributions can be deducted from your income. This serves to reduce your taxable income. Pension adjustment is a non-taxable but it will reduce your RRSP contribution for the next year. Taxes are complex and have to take your individual situation into account. However, following is a simplified example to explain what the above means.
Suppose your income is $80,000. You contributed $10,000 to your the company pension plan and your employer matched that with $10,000. Your taxable income would be $80,000 – $10,000 = $70,000. You avoid tax on the $10,000 in your highest tax bracket. For 2020 tax year, the highest tax bracket on $80,000 would be 20.5%. In Alberta, the provincial income tax would be 10%. So you save 30.5% which is $3050 in taxes you don’t have to pay. The $10,000 contributed by your employer will neither increase your tax nor decrease it. It will however reduce your RRSP contribution limit so you would be able to contribute less money to your RRSP next year and will therefore will not be able reduce your taxable income as much as you could have this year through RRSP contributions.
Give these facts, should you or should you not contribute to employer pension plans. For most of us it makes sense to contribute to employer pension plans if the employer is matching the contributions. If the employer is not matching the contributions, than you are better off contributing to your RRSP. Employer contributions are free money for your future self that you will lose if you do not contribute.
Not all employer pension plans are equal so you need to consider the details. Are your contributions being used to buy the company’s own stocks? If this is the case, are you able to sell those stocks if you wish to do so? If not, don’t contribute to this plan. Enron employees contributed to their pension plans and the company used it to buy their stocks. When the company went bankrupt, employees lost their employment and their retirement savings.
Pensions are a great safety for your future self but you should understand its tax implications on your current self as well as your future self. In addition, understand what the employer is offering in terms of a pension plan and the risks associated with being a member of that plan.
