A Deferred Profit Sharing Plan (DPSP) is a retirement savings plan that your employer offers to help you save for retirement. Only employers can contribute to a DPSP, which makes it a unique and valuable benefit. Let's look at what a DPSP is, how it works, and how it can fit into your overall retirement savings strategy.
What is a DPSP?
A DPSP, or Deferred Profit Sharing Plan, is a retirement plan that your employer sets up to help you save for retirement. Through a DPSP, your employer shares a portion of the company's profits with you. The money your employer contributes grows tax-free while it's in the plan, and you won’t pay any taxes on it until you withdraw the funds. This makes a DPSP a great way to save for retirement, allowing your savings to grow with some nice tax advantages.
How do DPSP contributions impact my RRSP limit?
Any money your employer puts into your DPSP will reduce how much you can contribute to your RRSP the following year. For example, if your employer adds $1,000 to your DPSP in 2024, your RRSP contribution room for 2025 will be reduced by $1,000. This adjustment is made to ensure you don’t get extra tax benefits for the same retirement savings.
What is DPSP vesting?
Vesting is when you gain full ownership of the money your employer has put into your DPSP. Typically, there is a waiting period of up to two years before the employer's contributions are fully yours. This waiting time is known as the vesting period.
If you leave your job before you are fully vested, any unvested funds in your DPSP may go back to the employer, and you wouldn't keep those contributions. However, you do regain the RRSP contribution room that was reduced by these forfeited DPSP contributions, allowing you to contribute more to your RRSP in the future.
Once you are fully vested, all the money in your DPSP, including your employer's contributions, is yours to keep, even if you leave your job. Some employers may waive the vesting period in certain situations, such as retirement or voluntary resignation. It's a good idea to check your plan’s rules or speak with your HR department to find out when you will be fully vested in your DPSP.