Savings plans may be offered by some employers instead of, or in addition to, pension plans. Find out more about the different types of workplace savings plans your employer may provide.
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What is an employee savings plan?
An employee savings plan (ESP) is an account that your employer sets up to help you save. It’s not a registered plan. Your contributions are made from your after-tax earnings. Investment earnings such as interest income, dividends, or capital gains are taxable to you each year.
You decide how your money is invested from the investment options your employer provides.
The plan may restrict withdrawals or impose fees for withdrawals. Understand the details of your plan before you sign up.
What is a deferred profit sharing plan?
A deferred profit sharing plan (DPSP) is set up by your employer to help you save for retirement. Companies often combine a this plan with a pension plan or Group RRSP to provide retirement income for employees.
You don’t make contributions — the company does, from a portion of its profits. deferred profit sharing plan contributions are tax-deductible to your employer. You won’t pay tax on contributions until the money is withdrawn.
With most plans, you decide how your money is invested. Some companies require employees to buy company stock with some of the contributions. Your investment earnings are tax-sheltered. You don’t pay any tax on the earnings until you withdraw them.
Your Registered Retirement Savings Plan (RRSP) contribution room is reduced by the DPSP contributions you received in the previous year. When you leave your employer, your DPSP money can be transferred to a RRIF, used to buy an annuity, or taken in cash (it will be taxed as income in the year you receive it).
What is an employee profit sharing plan?
An employee profit sharing plan (EPSP) lets you share in the profits of the company you work for. Your employer is required to make contributions to your employee profit sharing plan according to a formula based on its profits.
EPSP contributions are allocated to employees each year. You may also be allowed to make contributions. Some employers let you choose each year between having your EPSP allocation paid out to you or having it remain in the EPSP account.
It is not a registered plan. Your contributions are made from your after-tax earnings. You must pay tax on employer contributions allocated to you each year, and on any investment earnings these allocations earn.
What is an employee stock purchase plan?
An employee stock purchase plan (ESPP) lets you set aside a percentage of your pay to buy stock of the company you work for. Your contributions are matched in part or in full by your employer. The total amount is used to buy company shares at market value every pay period.
Your employer’s matching contributions are fully taxable to you as employment income. Many employee stock purchase plans let you hold your stock in a Group RRSP so that contributions are tax-deductible.
In this plan, your investment will rise and fall with the fortunes of one company’s stock. So consider contributing only a small portion of your total savings to an ESPP.
Learn more about investing in stocks.
Even if a savings plan is not a registered plan, like an RRSP, there may still be implications for your RRSP contribution room. Also ensure you know the tax implications and whether your earnings are considered taxable income.
Summary
Your employer may offer different kinds of savings plans to help you save for the future. Learn more about the types of plans you may have access to. There are four main types of workplace savings plans, including:
- Employee Savings Plan (ESP) – is not a registered savings plan – investment earnings are taxable to you.
- Deferred profit sharing plan (DPSP) – is a tax-sheltered plan funded by your employer from its profits.
- Employee Profit Sharing Plan (EPSP) – you contribute to the plan, but your contributions and earnings are taxable.
- Employee Profit Sharing Programs (ESPPs) – are investments in one company. Make sure you read the prospectus and know your risk tolerance.
