Are you one of the lucky people who has a pension plan at work?
Have you been asking yourself, “Should I also be contributing to an RRSP?” Well, like most things to do with money, it depends.
Figure out how good your company pension plan is. Is it well funded? Hundreds of plans in Canada, including one belonging to a bank, are underfunded. Don’t assume. Ask. Will it provide what you’ll need to retire comfortably?
Think about when you’re likely to retire. Since 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. But if you’re going to sweat it to the very end, you’d be better off maximizing your TFSA every year before looking at an RRSP.
Consider how long you will be in the job. It takes a goodly amount of time for a defined pension plan to vest enough to give you a good income when it comes time to hang up your boots. If you’re in a mobile profession, consider the RRSP a necessity.
Also think about whether the pension you’ll receive will be enough. You may need to have a pool of money for things above and beyond the basic expenses your pension will cover.
If you decide you do want to contribute to an RRSP even though you belong to a pension plan at work, know that the calculation is slightly different for you than for folks who don’t have a pension plan. It’s because the contribution to the pension plan affects how much you can put in an RRSP.
A pension adjustment (PA) is calculated to equalize, at least somewhat, the benefits received by those who belong to a pension plan and those who don’t. The PA reduces the RRSP deduction and represents the amount contributed by an employee and/or employer to an employee account in a defined contribution pension plan or deferred profit sharing plan, or the value of pension benefits accrued during the year in a defined benefit pension plan. In some cases, the PA leaves very little RRSP deduction room remaining, so contributions to an RRSP are minimal.