Other types of workplace savings plans

Savings plans may be offered by some employers instead of, or in addition to, pensionPension A steady income you get after you retire. Some pensions pay you a fixed amount for life. Others save up money for you while you are working. You use that money to create income after you retire.+ read full definition plans. Find out more about the different types of workplace savings plans your employer may provide.

What is an employee savings plan?

An employee savings plan (ESP) is an accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition that your employer sets up to help you save. It’s not a registered plan. Your contributions are made from your after-taxAfter-tax The money you have left after you pay taxes on money that you made working or investing.+ read full definition earningsEarnings For companies, it’s the money they make and share with their shareholders. For investors, it’s the money they make from their investments.+ read full definition. InvestmentInvestment An item of value you buy to get income or to grow in value.+ read full definition 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 optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition 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)Deferred profit sharing plan (DPSP) A plan that employers use to build a retirement fund for employees. The company pays a share of its profits into the fund. The money grows inside the plan tax-free. Note: employees cannot put their own money into a DPSP.+ read full definition is set up by your employer to help you save for retirement. Companies often combine a this plan with a pension plan or Group RRSPRRSP See Registered Retirement Savings Plan.+ read full definition to provide retirement income for employees.

You don’t make contributions — the company does, from a portion of its profitsProfits A financial gain for a person or company. Equals the money left over after you subtract your costs from the money you made.+ read full definition. deferred profit sharing plan contributions are taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition-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 stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition 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 PlanRegistered Retirement Savings Plan A plan that lets you save for retirement while lowering your income taxes. You choose how you want to invest your savings. You don’t pay tax on any money in your account until you take it out.+ read full definition (RRSP) contribution roomContribution room The amount you can put into a savings plan like a Registered Retirement Savings Plan (RRSP). If you do not put the full amount into the plan each year, you will have extra, unused contribution room that you can use in later years. Example: Let’s say you can contribute $12,000 to your RRSP this year,…+ read full definition is reduced by the DPSP contributions you received in the previous year. When you leave your employer, your DPSP money can be transferred to an or 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 shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition 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 planStock purchase plan A plan that lets employees buy shares of their company. Often you can get the shares at a discounted price or your employer will match the dollars that you put into the plan.+ read full definition (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 valueMarket value The value of an investment on the statement date. The market value tells you what your investment is worth as at a certain date. Example: If you had 100 units and the price was $2 on the statement date, their market value would be $200.+ read full definition 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 contributionContribution Money that you put into a savings or investment plan.+ read full definition room. Also ensure you know the tax implications and whether your earnings are considered taxable incomeTaxable income The amount of income you have to pay tax on, after tax credits and deductions.+ read full definition.

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)Employee savings plan (ESP) A type of workplace savings plan. A non-registered account that your employer sets up to help you save. You decide how your money is invested from the investment options your employer makes available. Investment earnings are taxable to you.+ read full definition – 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 prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition and know your risk tolerance.

Last updated April 19, 2023