How your pension contributions affect your RRSP room
February 12, 2014
Tax season is approaching, and so is the deadline for contributing to your RRSPs. When considering whether or not to contribute, it is important to understand the benefits of contributing to your Teachers' pension plan and how this affects your RRSP room.
The benefit you earn through the Teachers' pension plan is linked to RRSP contribution room. This means the greater the value of your pension benefit, the less room you will have available to contribute to an RRSP.
Every member of a registered pension plan receives an annual pension adjustment (PA). A PA, which appears on your T4, reflects the value of the pension benefits you earned in a year. This is the Canada Revenue Agency's (CRA) way of leveling the playing field between those who are members of a defined benefit pension plan and those who must rely solely on RRSPs for retirement income.
You can find your RRSP contribution room on the Notice of Assessment provided by the CRA each year.
Benefits of contributing to your pension plan
The security of a defined benefit pension plan is hard to beat. First off, your Teachers' pension is not dependent upon the performance of personal investments. Second, contributions to your pension, and to an RRSP, are both deductible from your taxable income. And finally, contributions to your pension plan, including buybacks, are matched by the Ontario government or your employer. The same cannot be said for RRSPs or Tax-Free Savings Accounts.
How to maximize your Teachers' pension
Buying back credit for employer-approved leaves also maximizes the value of your Teachers' pension. If you choose to pay for your buyback while on leave, you will receive a PA for the service, just as you would if you worked during your absence. Your current RRSP contribution room will be reduced by the amount of your PA.
If you previously contributed to another pension plan you may be able to transfer that credit into Teachers'. By consolidating all of your credit into one plan, you can make the whole greater than the sum of multiple parts.