CPP vs RRSP: Can you transfer your CPP to an RRSP?

by Ann deBruyn

A man on a call, while sitting at his computer, trying to figure out if he should move his CPP into his RRSPs.

Photo by Karolina Grabowska from Pexels

I’m 40 years old. Can I transfer my accumulated CPP to an RRSP?

—Franco

I am going to cut to the chase here, Franco. You cannot transfer your Canada Pension Plan (CPP)  to a registered retirement savings plan (RRSP). Some pensions can be transferred to an RRSP, and there are ways to avoid CPP contributions as well as reasons to treat your CPP like an RRSP. So, your question does bring up some interesting discussion points.

When is CPP paid?

CPP contributions generally result in an increase to a future CPP retirement pension that starts to be paid between a retiree’s ages 60 and 70. I say “generally” because if a contributor reaches the maximum years of contributions, or if a retiree’s spouse dies and their combined retirement and survivor’s pensions hit the maximum, for example, contributions may not result in an increase. 

Retirees often start their CPP as early as possible so they can preserve their RRSP investments. Interestingly, many if not most retirees would probably be better off deferring. Those who live well into their 80s will receive more lifetime income from CPP if they wait until age 70, rather than starting earlier. 

Transferring money for retirement

Most pensions are eligible to be transferred to an RRSP. Defined contribution (DC) pensions are like RRSPs, in that contributions are tax deductible, accounts generally consist of mutual fund investments. And the plan grows on a tax deferred basis until withdrawals begin. 

Upon leaving an employer with a DC pension, the account can be transferred to a locked-in account, like a locked-in RRSP. The locked-in status just means withdrawals cannot generally start until age 55, and there are maximum annual withdrawals that may apply upon converting the account to a life income fund (LIF) or locked-in retirement income fund (LRIF). 

Defined benefit (DB) pensions can sometimes be transferred to a locked-in retirement account, depending on the plan rules. Some DB plans can only be transferred to an RRSP up until a certain age, assuming the plan member has retired or otherwise left the employer. DB plans are also subject to actuarial valuations with only a calculated portion eligible to be transferred on a tax deferred basis with some of the commuted value generally being taxable to the recipient in the year of transfer. 

How to stop contributing to CPP

Employees cannot stop contributing to CPP until they reach the age of 65, Franco. If you are still working after 65, you must complete Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election, in order to stop contributions. 

For any employees who do complete the forms, they should consider asking their employer for a raise. The maximum employer contribution to the CPP is $3,500 for 2022 for employees earning at least $64,900. If your employer does not need to contribute this amount, arguably you would have a pay cut of $3,500. 

The Fraser Institute found in 2016 that the real rate of return for the combined employee/employer contributions to the CPP was projected to be about 2.1% for those retiring after 2036 (people born in or after 1972, like you, Franco). 

To be clear, the “real” return is the return over and above the rate of inflation. Despite the current spike in the inflation rate, in a typical target 2% inflation environment, that would suggest a 4.1% actual or nominal rate of return for the employee/employer contributions. 

Do business owners have to pay CPP?

An incorporated business owner can effectively opt out of CPP at any age. An owner-manager can pay themselves a salary or a dividend for their compensation. Salary requires CPP contributions while dividends do not. So, if an incorporated business owner pays dividends on their shares instead of salary for their employment, they can avoid CPP. A business owner does not need to take a salary and they can choose dividends instead. 

There can be drawbacks to this approach, though. 

Dividends do not create RRSP room, and it is often beneficial for an incorporated business owner to contribute to their RRSP. Certain expenses, like child care, cannot be deducted if both parents do not have salary or other employment or self-employment income. 

Also, at many income levels, regardless of province or territory, the tax payable on salary is lower than the combined tax payable on dividends. I say “combined” tax for dividends because these are taxed differently than salary, with some corporate tax payable on the income before it can be paid out to be taxed to the shareholder personally. As such, paying salary is often advantageous for owner-managers, and until age 65, that means CPP contributions. 

CPP vs RRSP

At the end of the day, CPP and RRSPs are not much different. They both generate a retirement income. The earlier you start taking money from either of them, the less you get. CPP can start as early as age 60 or as late as age 70 and the longer you defer it, the higher the monthly payments. Math aside, CPP is good because it is government-guaranteed, inflation-protected income. RRSPs have an element of risk and can be more difficult for people to invest as well and as aggressively as they age, plus they may not last as long as you if you live into your 90s (whereas CPP is for life). 

In my mind, Franco, CPP and RRSPs are basically the same thing—a future retirement income stream. These may take different forms, and investors have more influence over the potential outcome of their RRSP income. There are ways to opt out of CPP, though doing so may or may not be in a contributor’s best interest. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. If you have a question for Jason, please send it to ask@moneysense.ca.

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