Pension + RRSP?

The RRSP was created in 1957 to help those Canadians who did not belong to company pension plans to save for their future.

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The RRSP was developed to even the playing field between employees who had company pension plans and the self-employed or those who worked for organizations too small to offer a company pension plan. Over time, the importance of the RRSP grew as pension plans began to disappear.

There are folks lucky enough to have a pension plan at work who wonder, “Should I also be contributing to an RRSP?” Well, like most things to do with money, it depends.

The first thing you have to figure out is how good your company pension plan is. You can’t take for granted that a pension plan is completely safe. There are systems in place, but like everything else there’s always a way around a system. So think about this:

Is your plan well funded? Is it well protected? And will it provide what you’ll need to retire comfortably? If you’re a teacher you’re probably fine. If you have a government pension (if you’re a civil servant, a policeman, a fireman or a nurse, for example) and plan to work until you qualify for full benefits, then you’ll probably be A-OK. If you work for a private corporation, it all depends on how sturdy you think your company is.

When will you retire? Most pension plans penalize you heavily for drawing benefits before the normal retirement age. If you think you may want to drop out early, then having some money in an RRSP might be a good idea. Sweating it to the very end? Consider maximizing your TFSA every year before looking at an RRSP.

If you decide you do want to contribute to an RRSP even though you belong to a pension plan, the calculation is slightly different for you since the contribution to the pension plan affects how much you can put in an RRSP.

A pension adjustment (PA) is calculated, which reduces the RRSP deduction. If you’re in a wonderful plan, the PA leaves very little RRSP deduction room remaining, so contributions to an RRSP are moot.

If the pension + RRSP question is top-of-mind for you, ask yourself these questions:

• Am I so sure that I’ll have this job forever and that I am well-set for retirement?
• Will my pension be enough, or do I need to have a pool of money for things above and beyond what my pension will cover?
• Will using a non-RRSP investment portfolio work better for me than investing inside an RRSP?
• What else could I be using this money for to bring value to my life? Does a TFSA make more sense? Should I be saving for my kids’ post-secondary schooling? Do I have a sound emergency fund?

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