DPSP Vs RRSP - The Important Differences

While there are plenty of different account types for retirement savings, let’s take a look at two different options. These options are RRSPs, also known as Registered Retirement Savings Plans, and DPSPs, which are also known as Deferred Profit Sharing Plans. Let’s take a look at the differences between the two. 

Deferred Profit-Sharing Plans and How They Work

Deferred Profit Sharing Plans are a type of registered retirement plan that allows companies to share company profits with their employees. The difference between both a DPSP and traditional employment retirement plans is that only the employer can contribute to them. Employees aren’t able to contribute. 

Since DPSPs are registered plans, they’re registered with the Canada Revenue Agency. However, for a DPSP to be registered with the CRA, it has to meet the specific requirements of the Income Tax Act. There are contribution limits to DPSPs as well, and employers are allowed to claim tax deductions on all contributions. 

When it comes to taxes, employees also don’t pay any taxes on contributions to DPSPs that are made on behalf of them. Everything in your DPSP accumulates tax-free in your account, and you only pay taxes on amounts once they’re withdrawn. It’s important to remember, though, that all DPSP contributions made in a year reduce your RRSP contribution room. 

Registered Retirement Savings Plans and How They Work

RRSPs, also known as Registered Retirement Savings Plans, are accounts registered with the Canada Revenue Agency designed to save money for retirement. All contributions added to RRSPs are tax-free and offer tax incentives. However, there are annual RRSP contribution limits that you have to stay within. As long as you stay within these limits, though, your investments will have tax-deferred growth on a tax-deferred basis. 

Like with DPSPs, you only pay taxes on RRSP amounts once they’re withdrawn. If you withdraw your RRSP amounts before you retire, then you still have to pay tax on the amount that you withdraw. The amount that you pay in tax is known as a withholding tax. These amounts are:

Group RRSPs

While many people have their own RRSPs, you can also get group RRSPs, which are another form of pension through your employer. With group RRSPs, you have both employer contributions and employee contributions. The restrictions on how much you can withdraw through RRSPs and when you can withdraw the amounts are up to the employer. Each group RRSP is different.

When it comes to how your group RRSP is invested, you often get to choose that for yourself. With many group RRSP plans, there is a limit as to how much your employer can contribute, but you can choose your own employee contribution amount. That said, not all group RRSPs have a matching contribution. Some employers may choose not to add any contributions at all. Most employers choose a matching program where they match employee contributions. 

DPSP and RRSP Contribution Limits

Whether you have a DPSP or an RRSP, there are certain limits that you can’t exceed. Let’s take a look at the limits for both. That said, DPSP limits only make a difference to employers since they’re the only ones who can contribute. However, DPSP contributions do count towards your RRSP contribution limit. 

DPSP Amounts

Every year, the DPSP contribution limit changes. Let’s take a look at the DPSP contributions for the last few years. However, while this is the maximum amount, employers can only contribute up to 18% of the employee’s annual income or half of the money purchase limit. It’s whichever total amount is lower. With DPSPs, though, if the company has no earnings in a fiscal year, then no contributions are required. 

RRSP Amounts

When it comes to RRSP contributions, the limit amounts are different from those of DPSPs. The limit amounts are actually different for each person since they’re based on your annual income. For each year, your contribution limit is up to 18% of your annual income up to a maximum. Here are the maximum amounts. 

What Happens to Contributions When You Quit Your Job?

Whether you have a DPSP or a group RRSP, you are able to keep your contributions after you quit your job. That said, there are some stipulations on how you can keep the funds. 

DPSP

If the employer has provided the employee with a DPSP, after the employee leaves, they’re able to keep the funds. The vesting period is usually 2 years. After the 2 years are up, the funds then belong to the employee. This can be done by transferring the funds to an RRSP. From there, the amounts can be withdrawn from the RRSP, but a withholding tax will have to be paid. The funds can also be withdrawn directly from the DPSP, but the employee will have to pay tax. As an employee, the best way to figure out how to do this is to contact your DPSP provider.

Group RRSP

Group RRSPs are RRSPs that are offered by your employer as group benefits on a group basis. If you have a group RRSP, it’s important to know that once you quit, the funds will stay with you and not your employer. You also have the option to keep the group RRSP or transfer the funds to your own RRSP. You can also choose to withdraw the money at any point, but you will have to pay the withholding tax. 

Withdrawing From DPSPs

As we mentioned, when you quit your job and have completed the two-year vesting period, you can withdraw funds from your DPSP. However, if you are choosing to withdraw from your DPSP while you’re still employed, then how much you can withdraw and when is up to the discretion of your employer. That said, if you’re able to withdraw any funds, they will be fully tagged as part of your income. 

Advantages and Disadvantages of DPSPs

DPSPs are just one of the many forms of pension accounts for your employer. While it’s just one of many options, let’s take a look at the advantages and disadvantages of this type of pensionable account. 

Advantages

DPSPs aren’t only a great option for employers, but they’re also a great option for employees. The contributions are flexible, and there are no contributions required for employees. They also have a short vesting period and allow you to withdraw money more flexibly than RRSPs. 

Disadvantages

While DPSPs are great since there are no employee contributions required, the contribution amounts do decrease your total RRSP contributions. Also, DPSP withdrawals can’t be made until the vesting period is completed.

One of the largest disadvantages to a DPSP, though, is the employer’s contributions. Since the amounts deposited into your account annually are based on fiscal year earnings, the amounts that the employer contributes annually can be unpredictable. In some years, there may be no deposits if there are no company profits that year. 

Advantages and Disadvantages of RRSPs

When it comes to RRSPs, there are many reasons that people choose to invest in them. That said, there are some drawbacks to RRSPs, just like there are with other investment accounts. Let’s take a look. 

Advantages

One of the great things about RRSPs is the tax advantages. All of the money put into RRSPs for the tax year is tax deferred. This means that you don’t pay any taxes on the amounts that are put into an RRSP account until they’re withdrawn. Depending on how much you may owe on your annual income taxes, the tax deferral options from RRSPs can be a valuable tool at tax time, providing tax savings. 

While you do have to pay withholding taxes on any withdrawal made from an RRSP account, there are a few exceptions. These acceptions are using the funds to further your education or purchase your first home. In order to do so, the funds have to be withdrawn through the Home Buyers Plan as well as the Lifelong Learning Plan. 

For either program, once you withdraw the funds tax-free, you do have to eventually pay the funds back. With the HBP, you have two years after the year you purchase the home to start paying back the funds. You then have 15 years to pay back the funds in full. For the LLP, you have 10 years to pay back the funds that you borrowed. 

With GRSPs, there are no contribution limits either. There are also no vesting periods like there are with DPSPs; contributions are automatically vested, and the management fees are low. Since all contributions for GRSPs are taken off of your paychecks, you don’t have to manage them. 

Disadvantages

While there are plenty of advantages to RRSPs, there are also some disadvantages. These disadvantages include withholding taxes on withdrawn amounts as well as the risk of losing your principal funds. However, when it comes to investing the funds, you do have a choice on how they’re invested. 

Like with any investment, you have the ability to earn money or lose money with RRSPs. You can either choose to invest aggressively or more moderately, depending on the length of time you’re investing the funds. Like with any investment, there’s the risk of losing your principal amount instead of earning more funds over time. 

Unlike with individual RRSPs, there are limits on your GRSP withdrawals. Employers often set limits on how much you’re able to withdraw while you’re still working for the company. It’s also important to remember that while you’re still working for the company, your employer can cancel the GRSP at any time. 

EPSPs Vs DPSPs

While we have discussed DPSPs, also known as Deferred Profit Sharing Plans, we haven’t discussed. EPSPs. EPSPs, also known as Employee Profit Sharing Plans, are similar to DPSPs, but employees are able to make contributions, unlike DPSPs, where only employers make contributions. There are a few other differences as well. 

Not only do EPSPs allow for employee contributions, but your investment earnings and contributions are taxable, unlike with DPSPs. EPSPs are also not registered, unlike DPSPs, which are registered with the Canada Revenue Agency. 

DPSPs and Taxable Income

With DPSPs, all contributions are tax-deductible for company owners. That said, they aren’t included as part of an employee's taxable income, and all earnings made in a DPSP are tax-free until they’re withdrawn from the account. The funds in a DPSP aren’t considered to be taxable income until they’re withdrawn. 

Other Types of Retirement Savings with Employers

While we’ve discussed DPSPs, EPSPs, and GRSPs, these aren’t the only retirement savings options available from your employer to help with your retirement planning. You can also get Employer Pension Plans, which come in the form of defined contribution plans and defined benefit plans. Let’s take a look at how these work. 

Defined Contribution Plans

These plans can vary from employer to employer, but these plans generally work because this type of account has defined contributions. This means that all contributions are put into the account on a defined timeline by your employer, you or both. This contribution is normally made on each payday, but it can also be made monthly, annually, or quarterly. 

Once you do retire, the amounts you receive are based on your contributions and how they’ve grown. The funds from the account are transferred into an account that allows the funds to be taken out as income. However, if you quit your job before it’s time to retire, then you can choose to keep your money in the retirement account or transfer it to another retirement account that is not connected to your former employer. 

Defined Benefit Plans

Defined benefit plans are different from defined contribution plans. With defined benefit plans, you’re promised a certain income by your employer at the time of retirement. Regular contributions are still required for this type of retirement plan as well, though. These contributions can be made by just your employer or by both you and your employer. 

While the funds from a defined benefit plan are invested just like other retirement plans, you still get a guaranteed retirement income. What affects your total guaranteed amount is the number of years that you contributed to the account, as well as your annual salary (also referred to as the employee’s salary). 

Final Thoughts

While thoughts of retirement can be scary, it’s important to have a plan. This is why many employers offer different options to help you prepare. There are a wide variety of different types of pension accounts out there, but two common ones offered by employers are Deferred Profits Sharing Plans and Group Retirement Savings Plans. 

Both of these types of retirement plans are registered with the federal government. This means that you defer taxes on all contributions to these accounts, saving you money throughout the year. That said, there are many differences with each type of plan. Even with these many differences in consideration, you can’t go wrong with either of them. Each one can help you save for retirement and build up your savings for the future and other financial goals.