The VRSP is a retirement savings plan that helps employees save for their retirement through a salary deduction.

Many employers will be required to offer employees a VRSP. However, employees are not required to participate in a VRSP offered by their employer.

Here is what you should know about VRSPs.

Features of the VRSP


VRSP

What amount will be paid upon retirement?

Based on accumulated amounts

Are there income tax savings associated with making contributions?

Yes. The contributions are deductible from your taxable income. Therefore, you don’t pay income tax on the money deposited in a VRSP.

Will you have to pay income tax on your employer’s contributions?

No

What percentage of your salary will be contributed to the VRSP?

A default percentage is suggested by the employer.

The employee can opt to change this percentage. He can also decide not to contribute.

What is the annual maximum contribution limit?

18% of annual income

  • $25,370 in 2016

    $26,010 in 2017

This maximum will be reduced by other contributions, for example:

  • contributions that your employer makes to your VRSP or your RRSP

  • contributions that you make to your RRSP.

 

What is the maximum age for making contributions?

On December 31 of the year in which you turn 71

Can you choose your investments?

No. However, you can choose from among various investment options (for example, low-risk investments or investments with more potential and higher risk).

Is the investment income taxable?

No. However, when you withdraw amounts from the plan, you’ll have to add them to your taxable income.

Are withdrawals taxable?

Yes

Who can be a member of a VRSP?

There are two possible situations.

  1. Your employer offers you a VRSP.
    • If you’re 18 years of age or older, and you’ve worked for this employer for at least one year, you’re automatically enrolled.
    • However, you aren’t required to contribute.
  2. Your employer doesn’t offer you a VRSP, or you don’t have an employer.
    • You’re not automatically enrolled in a VRSP.
    • However, you may want to enrol in a VRSP. In this case, you’ll need to contact an authorized administrator
    • Remember, many employers will be required to offer a VRSP to employees who:
      • are 18 years of age or older
      • and have worked for this employer for at least one year

How does it affect income tax?

A VRSP is similar to an RRSP as far as income tax.

  • The contributions are deductible from your taxable income.
  • If your employer also makes contributions to your VRSP, you won’t pay any income tax on this money.
  • The investment income generated by the funds in a VRSP accumulates tax-free. In the long term, that’s a major advantage.
  • However, when you withdraw funds from your VRSP, the withdrawals are added to your taxable income. You may therefore pay income tax on the withdrawals.
Insight

How much should you contribute to your VRSP?

The answer depends on your personal situation. How much do you have in savings? What standard of living do you want during retirement? In how many years do you plan to stop working?

Use our calculator Mon plan, je le fais maintenant! (in French only) to determine how much you should save every year until you retire.

End of the insight

What is the maximum amount you can contribute?

The contribution limit is the same as for an RRSP, i.e., 18% of your annual income.

  • maximum of $25,370 in 2016
  • maximum of $26,010 in 2017

Remember:

  • These maximum amounts include the contributions made by your employer.
  • However, if you are a member of the pension fund offered by your employer, the maximum amount will be reduced by the “pension adjustmentA pension adjustment is an amount that is used to determine the maximum allowable RRSP and VRSP contributions. In the case of a defined contribution pension plan, the PA reflects the employer’s and the employee’s contributions for the year.” determined by the Canada Revenue Agency.
  • Important: If you contribute to your RRSP, your maximum contribution to your VRSP will be reduced (refer to the box below).
Warning

The more you contribute to a VRSP, the less you can contribute to an RRSP.

  • Every $1 contributed to your RRSP lowers the authorized maximum contribution to your VRSP by $1.
  • Every $1 contributed to your VRSP lowers the authorized maximum contribution to your RRSP by $1.

You’ll therefore need to track how much you contribute to your RRSP and VRSP to ensure you don’t exceed the contribution limit for a registered plan.

If you exceed it, you’ll have to pay a penalty of 1% per month on the excess amount.

End of the warning

What investment options are available?

You can’t select investments on an individual basis. For example, you can’t decide to buy shares in ABC company.

An administrator manages the investments for a VRSP. The administrator may be an insurance company, for example.

The VRSP administrator will suggest investment options. Each option reflects certain risk and performance preferences. One of these is the default option. If you don’t select an option, this is the one that will apply!

Will my employer be required to offer a VRSP? If so, when?

Businesses under federal jurisdiction (such as banks, interprovincial transport companies, telecommunications companies and federal departments and public bodies):

  • Cannot offer their employees a VRSP.
  • May offer a Pooled Registered Pension Plan (PRPP), which is the Canadian equivalent of the VRSP, but they aren’t required to do so.
  • Despite this, as an individual saver, you can contribute to a VRSP. Find out more from an authorized administrator This link will open in a new window.

Businesses under provincial jurisdiction (all Québec businesses that aren’t under federal jurisdiction) will soon be required to enrol their employees in a VRSP if they have five or more employees who:

  • are 18 years of age or older
  • and have worked for this employer for at least one year

Number of eligible employees (over 18 years of age and working for this employer for at least one year)

Date on which eligible employees will be determined

Cut-off date for employer to enrol eligible employees

20 employees or more

June 30, 2016

December 31, 2016

between 10 and 19 employees

June 30, 2017

December 31, 2017

between 5 and 9 employees

The government hasn’t set a date yet.

The government hasn’t set a date yet. However, the date will be after December 31, 2017.

4 employees or less

The employer may offer a VRSP but isn’t required to do so.

Insight

How much will you accumulate in your VRSP?

Use our VRSP calculator!

End of the insight

Example

Take the example of Jérôme.

  • His salary: $50,000 per year
  • His VRSP contribution: 2% per year
  • His employer’s contribution: nothing
  • His marginal tax rateThe marginal tax rate is a percentage of tax to be paid; it is not calculated on total income (unlike the tax rate), but only on the last dollar earned.

    It answers the question: “If I had earned $1 more, how much additional tax would I have paid?”  
     : 40%
  • Return on the funds invested in the VRSP: 4.5%
  • His salary increase: 2% per year

VRSP contributions are deducted directly from his pay. Jérôme’s employer therefore deducts 2% of his salary every pay and deposits this money to Jérôme’s VRSP (the money belongs to Jérôme, not his employer). After the first year, Jérôme will have invested $1,000 in his VRSP (2% of $50,000).

VRSP contributions are deductible from his taxable income. Jérôme won’t pay income tax on his salary of $50,000 but on $49,000 instead. This represents tax savings of $400 (or 40% of $1,000). Therefore, Jérôme contributed only $600 into his VRSP ($1,000 deducted from his pay, minus $400 in tax savings).

The $1,000 contributed to the VRSP will be invested by the VRSP administrator. At the end of the first year, the $1,000 will have generated $21.

The returns generated by the VRSP will increase substantially over the years. Over a period of 20 years, Jérôme will have paid a total of only $14,578, but his VRSP will be worth $37,823. This represents investment income of $23,245 ($37,823 minus $14,578)! That’s much more than the $21 from the first year!

When Jérôme starts to withdraw money from his VRSP, the withdrawals will be added to his taxable income. He may have to pay income tax on these amounts.

Example: amounts accumulated by Jérôme over 20 years

Years

Annual salary

VRSP contribution (after-tax amount)

Accumulated amounts (tax might be payable on plan withdrawal amounts)

1

$50,000

$600

$1,021

2

$51,000

$612

$2,109

3

$52,020

$624

$3,267

4

$53,060

$637

$4,498

5

$54,122

$649

$5,806

6

$55,204

$662

$7,195

7

$56,308

$676

$8,669

8

$57,434

$689

$10,232

9

$58,583

$703

$11,889

10

$59,755

$717

$13,645

11

$60,950

$731

$15,504

12

$62,169

$746

$17,471

13

$63,412

$761

$19,553

14

$64,680

$776

$21,754

15

$65,974

$792

$24,081

16

$67,293

$808

$26,539

17

$68,639

$824

$29 136

18

$70,012

$840

$31,877

19

$71,412

$857

$34,770

20

$72,841

$874

$37,823

For more information about VRSPs, refer to Retraite Québec’s website This link will open in a new window.