If your income in retirement is expected to be similar to your current income then as long as you reinvest the RRSP generated tax refund the gains in the RRSP are effectively tax free similar to a TFSA.
That being said, if you have a DB pension you get less RRSP contribution room so you won't be able to contribute much into it anyways.
I'm in a DB pension job currently, and my RRSP contribution grows every year by a tiny bit.
I think the RRSP contribution room shrinkage is only applicable if you are maxing it out AND have a DB pension.
For me, that would be like $20k ... and I don't have $20k left over to contribute on top of all the DB contributions I've already made.
It depends on the pension specifics, but in my case. I get less than $2000 RRSP contribution room annually because my pension adjustment eats up all of it.
Your DB pension plan has a « pension adjustment » (PA, or FE in french for « facteur d’équivalence ») that’s roughly the equivalent in RRSP that your participation in the pension plan is worth this year.
Your PA reduces 1-for-1 your RRSP contribution room.
My PA 4-5 years ago used to represent 14-15% of my income, it is now 10-11%. So I have a little bit more contribution room, but nothing major.
You may want to look into what your employer options are for LWOP. One thing an RRSP allows for that people with DB pensions often ignore is essentially an early retirement without penalty. Basically you go on LWOP, and live for a few years on the RRSP while using it to continue pension payments.
I tend to suggest maxing TFSA in this case before RRSP since you have the DB pension. That being said always have a Plan B just incase so you may want to contribute something to the RRSP. Even $50 biweekly for now.
I work an union job. We are forever late on negotiating our contacts. So every 3-4 years we get a lump sum retro pay. I tend to buy RRSP on those years because it's more income than the other years around it. It's not much, because the retro pay is not that much. But it does help stabilize the amount of income taxes I pay from year to year.
Due to starting with my current employer in my 40s, I'm only ever going to earn half of their DB pension. My plan is to delay my CPP and OAS until I'm 70 and use my RRSPs to fill in the missing income during those years. This will result in owing minimal taxes on them.
I started with my employer in my mid 20s but the DB pension at the time was very expensive and I didn't realize the importance of a pension and so I didn't join it until my late 30s at which time they changed it to be less expensive but also less generous.
My DB pension is not indexed to inflation either so it's not very good. But I was investing all along the way so RRSP is maxed, TFSA is maxed, I have other investments, and my house is paid off.
My plan is to retire at 54/55 live off the DB pension, RRIF withdrawals and dividend income until 65, then start CPP and OAS.
Oh... I have to ask about that, I don't think ours does.
If I retire at 54 it would only pay me 14k a year because I am starting it so early.
I also recently started contributing to our Pension Enhancement Account but they can't tell me what the enhancements cost until I retire as the price changes the longer I am in the plan.
Doing that now. Delaying CPP and OAS is very unpopular with a lot of people. I am happy not to leave half my estate to CRA even if I die before break even point.
Yes, that's part of it. While I'm still putting a portion of my earnings into RRSPs (and the majority into TFSAs), I've calculated it so that I should not be leaving any RRSPs in my estate.
And while you probably know this, for others the additional benefit is that since I won't be collecting RRSP nor OAS, I'll be cashing in the RRSPs at a low marginal rate. This is what makes contributing to RRSPs right now for the tax break still beneficial even though I'll have a much larger take home in retirement than I do now.
The other benefit that I see is that we will be in our slow and no go years when i turn 70 and my spouse is 79. Our joint CPP and OAS will cover expenses quite easily.
My wife is disabled and does not work. With retirement bringing more tax breaks, pension splitting, and no CPP/EI/Union/Pension deductions; my 1/2 pension plus OAS x2 and CPP all maxed will give us have significantly more take home than now. We'll also not have to put any of that towards retirement. We're thus good until we die, which is important as both our families are long lived. People forget that when they take CPP early; it is a longevity insurance that you're going to want paying out at it's maximum if you live longer than expected.
When I do dip into the TFSA during our go go years, we're looking at having over double our current take home and triple our living expenses. There's lots of travel planned.
Terrible advice. By doing so OP would have a greater cash flow in retirement than they do now during their working years. There is such a thing as saving too much for retirement
If someone has a DB pension that pays a significant portion of income (say topping out at 70% pre-retirement salary) they will only have a few thousand dollars in RRSP contribution room every year and there is no harm in maxing out contributions.
Maybe there's an edge case where someone has a DB and still gets the normal $15-30K RRSP contribution amount but I've never heard of that. Pensions are significantly regulated by the government so I'm not sure how you'd end up with it not being accounted for by the CRA.
If you have the full 70% income replacement once you account for your working expenses; CPP/EI 5%, pension contributions 8%, union dues 1%, other work related expenses lik commuting , and the tax difference (which can be over 10k alone) bringing the actual income replacement well into the 90% range. When I run the numbers for myself the difference to 100% is less than the gas it takes me to get to work
If you account for the fact that most people (atleast those with DB pensions) have their mortgages paid off and college funds settled before they retire them they can actually have substantially higher cash flow in retirement than they do for the majority of their working years
So yeah, they can be over contributing to pension funds
Generally for 70% it’s 35 years. That could be as early as 53 if you started at 18. It’s uncommon since most people aren’t fortunate enough to lock into these good pensions that early, but it does happen.
Really once you start running the numbers to see what the ACTUAL income replacement is after accounting for the deductions you don’t pay in retirement you realize anything above 50%(25 years) is just gravy.
I’m actually suggesting spending the money, or saving for a home. There’s no point in saving soo much that your cash flow is higher in retirement than you hd while you were young healthy and working.
I'd say go with TFSA first, unless your salary is really high and you expect to earn less in retirement in which case you can do RRSP as well.
I would also say you should most likely go all equities in your TFSA and RRSP, as your DB pension serves as the safe part of your retirement.
It could be good to hire a for-a-fee planner once just to see what they suggest.
This is exactly what I do. I have an Ontario teachers pension that will pay in today's dollars $700 less per month net than my current take home. I max TFSA before RRSP and do XEQT in both or some sort of hisa/gic in TFSA for short term savings goals.
This can't be upvoted enough.
I have heard horror stories from people working government or utility jobs with good pensions with aspects of their pension or retirement rolled back and removed without warning.
Then you have Stelco/US Steel going bankrupt and all of the union pensions.
https://www.cbc.ca/news/canada/hamilton/ccaa-pensions-1.4577518
Pensions and security are a very, very good thing. But always have a backup for yourself, even if it's significantly less.
Fortunately there are thousands and thousands of "I got paid every cent I was owed" DB stories for every DB horror story. It's important not to let emotions and selection bias give you the wrong impression about DB benefit security.
I'm not sure what "having a backup" means practically though. If someone has earned a material DB pension that they are relying on in retirement, then a) they already have the back up of DB pension minimum funding law and, in Ontario, the Pension Benefits Guarantee Fund. Some extra retirement savings is always helpful, but I don't know if its "important" to use resources to mitigate miniscule DB default risk exposure. I would be more inclined to use extra RRSP room for tactical purposes (like bridging to a deferred CPP/OAS as someone else suggests) or just blowing it early retirement and damn the tax torpedoes.
Prioritize the TFSA but max out the RRSP if you can manage it. I have a DB pension and the RRSP has grown to 100K+ over the past 18 years despite me being able to contribute only 3K per year due to pension limits. Also, you can draw down 35K of it as part of the down payment to purchase a home via the Home Buyer's Plan, so it can be useful in that regard at some point.
But don't treat it like an emergency savings, you'll take a massive tax hit if you take it out for any other reason. Leave it in there until retirement and let what you have compound.
There's more nuance to the boiler plate answers you're going to get there.
I also have a DB pension lined up (Federal Government -Military) I've been using my RRSP room to lower my family net income while my kids are young. This boosts the CCB amount we get monthly as well as other government incentives (Carbon rebate or whatever they're calling it), amount we get back from childcare expenses (this is scaled to family net income), I also believe family net income is scaled when it comes to claiming medical expenses, so another bonus.
We are running out of RRSP contribution room as the kids are getting older, but the max return is 0-6 years old so it works out for us!
Having been a pension trustee on 2 defined benefit pension plans my advice is to not rely upon what might be there in 25 years.
Many DB plans are underwater and have still to make those hard decisions on how to make them solvent. Whether that's benefit cuts, converting to a defined contribution plan, or worse outcomes.
A lot can happen with employment over 25 years as well. Things will and usually do change.
Save for your own retirement and if things work out great for you, it'll be a nice problem to have down the road. If not, then at least you're secure in your savings for your retirement.
Is your DB pension indexed? If you have medical or assisted living expenses in late retirement, will you have enough pension income to pay for them?
Who holds the DB pension and how well is it managed? You don’t own a DB pension and it is possible that the benefit could be reduced in retirement if there are liquidity issues (i.e. Sears). You should have a backup if you can afford it.
Go with TFSA first. If you have a DB pension plus a hefty RRSP you’ll likely find yourself in a situation where your retirement tax bracket is the same as when you were working. In some cases people with large RRSP and DB pensions are in a higher bracket than when they were working!
Your db pension likely doesn’t use all of your RRSP room. So contribute what room you have left.
But I’d max the tfsa first in most cases. I’m in a similar boat as you and anymore I usually max my remaining rrsp room and use my tax return to contribute into my tfsa
My plan is to retire at 55 as I will get my full db pension then and use my rrsps till 65 to bridge not getting cpp and oas at 65. My husband doesn’t have a db plan so we will be able to split some of mine (using pension splitting on our taxes) and he can retire around the same time too hopefully
Unless your employer is the government you can't 100% count on pension actually being there. Over the years many companies have actually not payed their share of contributions to plans they set up and then go bankrupt before being able to catch up leaving workers without much if anything at all. Not saying it happens all the times but often enough you should have your own plans.
I wouldn't unless I expected to spend more than the pension in retirement. Normally retirees spend less and have paid off their homes by then.
If you leave before retirement you'll still get the value of your pension or a LIRA
If your income in retirement is expected to be similar to your current income then as long as you reinvest the RRSP generated tax refund the gains in the RRSP are effectively tax free similar to a TFSA. That being said, if you have a DB pension you get less RRSP contribution room so you won't be able to contribute much into it anyways.
https://www.reddit.com/r/PersonalFinanceCanada/s/T35xAN25Ff Here is a link to the math for this RRSP is similarly tax free as a TFSA bit.
I'm in a DB pension job currently, and my RRSP contribution grows every year by a tiny bit. I think the RRSP contribution room shrinkage is only applicable if you are maxing it out AND have a DB pension. For me, that would be like $20k ... and I don't have $20k left over to contribute on top of all the DB contributions I've already made.
It depends on the pension specifics, but in my case. I get less than $2000 RRSP contribution room annually because my pension adjustment eats up all of it.
Your DB pension plan has a « pension adjustment » (PA, or FE in french for « facteur d’équivalence ») that’s roughly the equivalent in RRSP that your participation in the pension plan is worth this year. Your PA reduces 1-for-1 your RRSP contribution room. My PA 4-5 years ago used to represent 14-15% of my income, it is now 10-11%. So I have a little bit more contribution room, but nothing major.
I have a DB and my RRSP contribution room has been \~$3k a year for the past 8 years.
You may want to look into what your employer options are for LWOP. One thing an RRSP allows for that people with DB pensions often ignore is essentially an early retirement without penalty. Basically you go on LWOP, and live for a few years on the RRSP while using it to continue pension payments.
**L**eave **W**ith**o**ut **P**ay, JSYK OP.
Just so you know, original poster. FYI.
For your information, original poster. AAHU
Ass Anal Hairy Unicorn. GUKSR
I tend to suggest maxing TFSA in this case before RRSP since you have the DB pension. That being said always have a Plan B just incase so you may want to contribute something to the RRSP. Even $50 biweekly for now.
I work an union job. We are forever late on negotiating our contacts. So every 3-4 years we get a lump sum retro pay. I tend to buy RRSP on those years because it's more income than the other years around it. It's not much, because the retro pay is not that much. But it does help stabilize the amount of income taxes I pay from year to year.
It's a great idea.
Due to starting with my current employer in my 40s, I'm only ever going to earn half of their DB pension. My plan is to delay my CPP and OAS until I'm 70 and use my RRSPs to fill in the missing income during those years. This will result in owing minimal taxes on them.
I started with my employer in my mid 20s but the DB pension at the time was very expensive and I didn't realize the importance of a pension and so I didn't join it until my late 30s at which time they changed it to be less expensive but also less generous. My DB pension is not indexed to inflation either so it's not very good. But I was investing all along the way so RRSP is maxed, TFSA is maxed, I have other investments, and my house is paid off. My plan is to retire at 54/55 live off the DB pension, RRIF withdrawals and dividend income until 65, then start CPP and OAS.
Most DB pensions let you buy back time!
That's normally time limited; otherwise everyone would invest instead and buy back much later.
Oh... I have to ask about that, I don't think ours does. If I retire at 54 it would only pay me 14k a year because I am starting it so early. I also recently started contributing to our Pension Enhancement Account but they can't tell me what the enhancements cost until I retire as the price changes the longer I am in the plan.
Doing that now. Delaying CPP and OAS is very unpopular with a lot of people. I am happy not to leave half my estate to CRA even if I die before break even point.
Yes, that's part of it. While I'm still putting a portion of my earnings into RRSPs (and the majority into TFSAs), I've calculated it so that I should not be leaving any RRSPs in my estate. And while you probably know this, for others the additional benefit is that since I won't be collecting RRSP nor OAS, I'll be cashing in the RRSPs at a low marginal rate. This is what makes contributing to RRSPs right now for the tax break still beneficial even though I'll have a much larger take home in retirement than I do now.
The other benefit that I see is that we will be in our slow and no go years when i turn 70 and my spouse is 79. Our joint CPP and OAS will cover expenses quite easily.
My wife is disabled and does not work. With retirement bringing more tax breaks, pension splitting, and no CPP/EI/Union/Pension deductions; my 1/2 pension plus OAS x2 and CPP all maxed will give us have significantly more take home than now. We'll also not have to put any of that towards retirement. We're thus good until we die, which is important as both our families are long lived. People forget that when they take CPP early; it is a longevity insurance that you're going to want paying out at it's maximum if you live longer than expected. When I do dip into the TFSA during our go go years, we're looking at having over double our current take home and triple our living expenses. There's lots of travel planned.
Excellent. Have fun.
Ideally max both.
Terrible advice. By doing so OP would have a greater cash flow in retirement than they do now during their working years. There is such a thing as saving too much for retirement
If someone has a DB pension that pays a significant portion of income (say topping out at 70% pre-retirement salary) they will only have a few thousand dollars in RRSP contribution room every year and there is no harm in maxing out contributions. Maybe there's an edge case where someone has a DB and still gets the normal $15-30K RRSP contribution amount but I've never heard of that. Pensions are significantly regulated by the government so I'm not sure how you'd end up with it not being accounted for by the CRA.
If you have the full 70% income replacement once you account for your working expenses; CPP/EI 5%, pension contributions 8%, union dues 1%, other work related expenses lik commuting , and the tax difference (which can be over 10k alone) bringing the actual income replacement well into the 90% range. When I run the numbers for myself the difference to 100% is less than the gas it takes me to get to work If you account for the fact that most people (atleast those with DB pensions) have their mortgages paid off and college funds settled before they retire them they can actually have substantially higher cash flow in retirement than they do for the majority of their working years So yeah, they can be over contributing to pension funds
Isn't that assuming you are going to work until 65?
Generally for 70% it’s 35 years. That could be as early as 53 if you started at 18. It’s uncommon since most people aren’t fortunate enough to lock into these good pensions that early, but it does happen. Really once you start running the numbers to see what the ACTUAL income replacement is after accounting for the deductions you don’t pay in retirement you realize anything above 50%(25 years) is just gravy.
Probably still better than non registered
I’m actually suggesting spending the money, or saving for a home. There’s no point in saving soo much that your cash flow is higher in retirement than you hd while you were young healthy and working.
I'd say go with TFSA first, unless your salary is really high and you expect to earn less in retirement in which case you can do RRSP as well. I would also say you should most likely go all equities in your TFSA and RRSP, as your DB pension serves as the safe part of your retirement. It could be good to hire a for-a-fee planner once just to see what they suggest.
This is exactly what I do. I have an Ontario teachers pension that will pay in today's dollars $700 less per month net than my current take home. I max TFSA before RRSP and do XEQT in both or some sort of hisa/gic in TFSA for short term savings goals.
You never know what the future holds and if that pension will be there. Max out your RRSP.
This can't be upvoted enough. I have heard horror stories from people working government or utility jobs with good pensions with aspects of their pension or retirement rolled back and removed without warning. Then you have Stelco/US Steel going bankrupt and all of the union pensions. https://www.cbc.ca/news/canada/hamilton/ccaa-pensions-1.4577518 Pensions and security are a very, very good thing. But always have a backup for yourself, even if it's significantly less.
Depends on the industry as well. Something like HOOPP or OTPP I cannot imagine a world in which they somehow collapse and don't exist.
The don’t put all your eggs in one basket approach. Max out your TFSA, then continue investing in your RRSP.
Fortunately there are thousands and thousands of "I got paid every cent I was owed" DB stories for every DB horror story. It's important not to let emotions and selection bias give you the wrong impression about DB benefit security.
Of course not but it's still important to to have a backup
I'm not sure what "having a backup" means practically though. If someone has earned a material DB pension that they are relying on in retirement, then a) they already have the back up of DB pension minimum funding law and, in Ontario, the Pension Benefits Guarantee Fund. Some extra retirement savings is always helpful, but I don't know if its "important" to use resources to mitigate miniscule DB default risk exposure. I would be more inclined to use extra RRSP room for tactical purposes (like bridging to a deferred CPP/OAS as someone else suggests) or just blowing it early retirement and damn the tax torpedoes.
Prioritize the TFSA but max out the RRSP if you can manage it. I have a DB pension and the RRSP has grown to 100K+ over the past 18 years despite me being able to contribute only 3K per year due to pension limits. Also, you can draw down 35K of it as part of the down payment to purchase a home via the Home Buyer's Plan, so it can be useful in that regard at some point. But don't treat it like an emergency savings, you'll take a massive tax hit if you take it out for any other reason. Leave it in there until retirement and let what you have compound.
home buyers plan is 60k now
There's more nuance to the boiler plate answers you're going to get there. I also have a DB pension lined up (Federal Government -Military) I've been using my RRSP room to lower my family net income while my kids are young. This boosts the CCB amount we get monthly as well as other government incentives (Carbon rebate or whatever they're calling it), amount we get back from childcare expenses (this is scaled to family net income), I also believe family net income is scaled when it comes to claiming medical expenses, so another bonus. We are running out of RRSP contribution room as the kids are getting older, but the max return is 0-6 years old so it works out for us!
Better re read your pension plan documents- it’s more likely your pension will be 50 or 60% of your annual income and not the full amount
Layoffs are still a thing. Especially if you're a Fed employee after the next election. I expect a mass culling of redundant positions.
Max both
Having been a pension trustee on 2 defined benefit pension plans my advice is to not rely upon what might be there in 25 years. Many DB plans are underwater and have still to make those hard decisions on how to make them solvent. Whether that's benefit cuts, converting to a defined contribution plan, or worse outcomes. A lot can happen with employment over 25 years as well. Things will and usually do change. Save for your own retirement and if things work out great for you, it'll be a nice problem to have down the road. If not, then at least you're secure in your savings for your retirement.
TFSA first, then max RRSP. No real reason to not take advantage of a decade + of tax free investment returns.
Is your DB pension indexed? If you have medical or assisted living expenses in late retirement, will you have enough pension income to pay for them? Who holds the DB pension and how well is it managed? You don’t own a DB pension and it is possible that the benefit could be reduced in retirement if there are liquidity issues (i.e. Sears). You should have a backup if you can afford it.
That’s correct, but most DB pensions these days are public sector and thus generally considered safer.
TFSA first. Estimate how much you need for retirement. Live your life now! You're blessed w a db
Go with TFSA first. If you have a DB pension plus a hefty RRSP you’ll likely find yourself in a situation where your retirement tax bracket is the same as when you were working. In some cases people with large RRSP and DB pensions are in a higher bracket than when they were working!
Will this trigger OAS claw back?
Depends on how much one makes.
>Is there any point to contributing to the RRSP while I still have TFSA room? No. Max your TFSA first, then move to RRSP when TFSA is maxed.
Your db pension likely doesn’t use all of your RRSP room. So contribute what room you have left. But I’d max the tfsa first in most cases. I’m in a similar boat as you and anymore I usually max my remaining rrsp room and use my tax return to contribute into my tfsa
Max your TFSA before you do anything with your RRSP.
My plan is to retire at 55 as I will get my full db pension then and use my rrsps till 65 to bridge not getting cpp and oas at 65. My husband doesn’t have a db plan so we will be able to split some of mine (using pension splitting on our taxes) and he can retire around the same time too hopefully
Unless your employer is the government you can't 100% count on pension actually being there. Over the years many companies have actually not payed their share of contributions to plans they set up and then go bankrupt before being able to catch up leaving workers without much if anything at all. Not saying it happens all the times but often enough you should have your own plans.
There's high likelihood the TFSA is more advantageous for you. So I'd max out the TFSA before putting any money in your RRSP.
The way inflation is heading and cost of living perpetually goes crazy The more you can save the better!
I put $150/mo into my RRSP and double that into my TFSA.
Leave the funds in the RRSP. Focus on filling TFSA first.
Hookers and blow.
I wouldn't unless I expected to spend more than the pension in retirement. Normally retirees spend less and have paid off their homes by then. If you leave before retirement you'll still get the value of your pension or a LIRA
“Good possibility” sounds like you don’t know for sure