One of the lesser known (though still considerably valuable) retirement savings plans is the deferred profit-sharing plan (DPSP). This kind of plan is only provided by companies, for the benefit of their employees. The investments they contain are managed by a trustee.
Given that the DPSP in Canada is not as well-known as other registered plans (such as RRSPs or TFSAs), this guide is designed to tell you everything you need to know about it. We’ll look at what is a deferred profit-sharing plan, the DPSP meaning, DPSP contribution limits, DPSP withdrawals, and how to transfer a DPSP to an RRSP.
We’ll also answer some common DPSP questions, such as; is DPSP tax deductible; can I make a DPSP withdrawal at any time; what is DPSP’s biggest advantage; and what happens to DPSP when I quit?
A DPSP in Canada is a type of company pension plan whereby companies help their employees to save for their retirement, using some of the company’s profits as contributions. Once a DPSP is set up, the company usually contributes to the plan once a year. Employees cannot contribute to their DPSP, only their employer can.
How does a DPSP in Canada work?
Contributions are based on the company’s profits for the year and employers have until 120 days after their fiscal year-end to contribute to the DPSP, meaning they would have to wait until the following fiscal year if they miss that cut-off point.
Employees can decide which investments go into their DPSP, meaning mutual funds, bonds, company shares, and exchange-traded funds, among other assets. Those investments grow on a tax-deferred basis; you won’t be charged tax on any growth in your investments, such as from interest, dividends, and capital gains.
The amount that companies contribute to the DPSP in Canada can vary from year to year, given that it’s based on the company’s performance and its profit levels.
What is a Deferred Profit Sharing Plan’s contribution limit?
The DPSP contribution limit for 2023 is $15,780 per employee. The DPSP contribution limit restricts the amount a company can contribute to any given year. If the employee also has a Registered Retirement Savings Plan (RRSP), any contributions made to their DPSP will reduce their RRSP contribution limit. For example, if they receive a DPSP contribution of $5,000, their RRSP limit will be reduced by $5,000.
What is the DPSP withdrawal rule?
While you can make cash withdrawals from a DPSP, this is rarely the wisest option, because the whole amount would be counted as taxable income. Instead, most employees prefer to make a DPSP transfer to an RRSP, annuity, or Registered Retirement Income Fund (RRIF).
DPSP transfer to RRSP
With a DPSP transfer to an RRSP, annuity, or RRIF, there won’t be any tax to pay when you transfer the money. You would need to set up an RRSP account first if you don’t already have one (and must be aged 71 or younger to do this). To transfer a DPSP to an RRSP, you would need to contact the DPSP provider and ask them to transfer the full amount into your RRSP.
If the employee who holds the DPSP dies, the money can be transferred to their spouse’s RRSP without being taxed.
DPSP vs RRSP
What is a DPSP’s main advantage compared to an RRSP? All the contributions are made by the company the employee works for, so this is effectively additional money given to you by your employer. Employees also pay no tax when contributions are made, though when the money is withdrawn, either directly from the DPSP or from the RRSP or RRIF it has been transferred to, it is classed as taxable income.
Another difference between a DPSP vs RRSP is that contributions to a DPSP can be vested. This means that the employee can only withdraw or transfer their DPSP contributions after a certain period of time (up to a maximum of two years). If they leave the company within the vested period, they won’t be able to take the DPSP with them.
RRSPs do not have vested periods, so if you leave the company at any time, you can take the full amount of your RRSP with you. The contribution limits of a DPSP vs RRSP are also quite different. As we mentioned, the DPSP contribution limit is $15,780 for 2023, while the RRSP limit is 18% of your taxable income from the previous year or the annual RRSP limit, whichever is the smaller amount.
What is a DPSP’s main benefit?
For the employee, the biggest advantage of a DPSP is that all contributions are made by the company. Another advantage is that the vesting period is quite short for a DPSP, meaning that you can transfer the money after only two years of working at the company (and this period could be less, depending on your employer’s conditions of employment).
Another employee benefit is that you won’t immediately pay any tax on your employer’s contributions. You only pay tax when you withdraw funds, which is usually in retirement when you could expect to be in a lower tax bracket. Also, all growth within the fund is tax-deferred; you don’t pay any tax until you withdraw money from it.
The biggest advantage of a DPSP for employers is that it helps attract and retain quality employees. Having a two-year vesting period helps reduce staff turnover, plus all contributions are tax-deductible for the employer.
How to boost your DPSP Retirement Savings
While DPSP contributions are a welcome addition to anyone’s retirement savings, they are rarely sufficient to guarantee a comfortable retirement. Many people with DPSP savings could find that, even with their CPP and OAS payments added, they don’t have enough money to enjoy the kind of retirement they’d always dreamed of.
The CHIP Reverse Mortgage can be a great addition to your DPSP, along with your government pension to boost your retirement income. It is a safe and secure financial solution that is sought by tens and thousands of Canadian homeowners 55+, allowing them to retire with financial peace of mind. You can access up to 55% of your home’s appraised value in tax-free cash. You won’t need to pay back what you owe until you move or sell your home. You don’t have to worry about monthly mortgage payments reducing your retirement income. Call us toll-free today at 1-866-758-2447 to find out how much you could borrow to help boost your DPSP retirement savings.
DPSP Frequently Asked Questions
What happens to DPSP when I quit?
If you leave the company after the vesting period (which is a maximum of two years), you can take the money with you, usually by transferring it to your RRSP. If you leave the company before the vesting period is over, you will have to forfeit the entire amount.
What is a Deferred Profit Sharing Plan’s impact on my RRSP?
Every dollar contributed to your DPSP in a certain year will reduce your RRSP contribution room in the following year by a dollar.
Is a DPSP tax-deductible?
The answer is yes and no; the employer’s contributions are tax deductible for the company, but they do not reduce the employee’s taxes. Employees don’t have to pay tax on the contributions at the time that they are made; the money is only taxable when it is withdrawn from the DPSP.
What is a DPSP’s withdrawal rule?
You can only withdraw money from the DPSP after the vesting period is over, which is a maximum of two years. After this period, you can withdraw the money (and pay tax on it) or transfer the money to an annuity, RRSP or RRIF and defer the tax until you withdraw money when you retire.