DC? RPP? The ABCs of saving for retirement

The tools and programs designed to help you save for retirement should help make things easier, not more confusing. Understanding important industry terms can simplify your options and ensure you’re not missing out on available opportunities.

Just the thought of saving for your retirement can be overwhelming. You have to pay for housing, food, and dozens of other necessities—all without having your usual income from a job! To help ease this burden, there are options available to grow your savings, many of which may be available through your employer. Though the terminology can be confusing, knowing your options is key to achieving your retirement goals.

What’s the difference between registered and nonregistered accounts?

The type of account you use can actually affect your savings. Simply put, registered accounts provide tax benefits while nonregistered accounts don't. Most likely, you’ve heard of a Registered Retirement Savings Plan (RRSP), which is a popular type of registered account. Any money you earn from investments within an RRSP aren't taxed until you take it out, and the deposits you make into the account can provide you with tax benefits.

On the other hand, you may have a savings or chequing account where you have your paycheque deposited. This is an example of a non-registered account. If you earn interest on money from these types of accounts, you will likely pay taxes on the gains.

RRSP and RPP: are they the same?

Like RRSPs, Registered Pension Plans (RPPs) are registered savings plans with tax benefits.

The two types of RRSPs are individual or group. Group plans offered by your workplace are often able to offer lower fees and pricing.

RPPs are group plans that are opened by your employer. There are two kinds of RPPs: a defined contribution (DC) pension plan and a defined benefit (DB) pension plan, with DC plans as the more common model.

Defined benefit or defined contribution: what’s the difference?

Both DB and DC plans are found in workplaces across Canada, and with both types, the employer contributes toward the plan along with the member, depending on the plan details.

With a DB plan, your employer defines the benefit you will receive in retirement. They set money aside during your career, and in retirement they will pay you a guaranteed amount of money throughout your retirement. Your employer manages the money in the plan to ensure they have enough to pay you in retirement. A key benefit of a DB plan is that no matter how long your retirement lasts, you'll continue to receive the money from your DB plan.

In a DC plan, you might choose both how much to save and how to invest the money. A DC plan offers a selection of investment options, but doesn’t offer a guarantee of how much it'll be worth in retirement. The value of the account at retirement depends on the total your employer—and possibly you—contribute to it and how much your investments earn.

In a typical DC plan, you may be able to choose a percentage of your paycheque to save, such as 3%. Other times, there is a required amount. Sometimes, your employer will match your contribution up to a certain percentage, which can really boost your savings. For instance, if you contribute $100 per paycheque toward your RPP and your employer matches the amount, you now have an extra $100.

What now? How to maximize your retirement savings

Understanding the important retirement acronyms is the first step toward making the most of your retirement savings now, while you’re working. There are many opportunities to build up your nest egg, some with the help of your workplace. Explore all the available opportunities and evaluate what works best for your retirement goals. If you’re not sure where to start, consider speaking with a financial advisor who can help you decide on a savings goals, create a budget, and grow your investment knowledge.

The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.