Why we should have a tax-free option for workplace pension plans GlobeInvestor
A decade has passed since the government introduced tax-free savings accounts , giving Canadians a “tax-free” option to save, along with the existing “tax-deferred” registered retirement savings plan . TFSAs are popular among all Canadians, but they are particularly suited to modest- and low-income earners.
And there are more than just financial gains. The financial security provided by workplace plans can enhance the mental health of Canada’s seniors, as well as their family and friends. A That’s because workplace registered pension plans parallel RRSPs in terms of their income tax treatment and calculation of seniors’ social benefits. Contributions are tax-deductible and investments increase tax-free while they remain in the plan – but money is taxed as ordinary income when withdrawn and the tax deferrals are generally much more valuable to higher earners.
By replacing the existing tax deferral with “prepaid taxes” on contributions, workplace TFPPs would complement existing registered pension plans, removing the current disincentives for lower and middle-income earners.As with TFSAs, contributions to TFPPs would be made using after-tax dollars and, therefore, would not receive a tax deduction. Once the money is in the plan, however, it would grow tax-free, and withdrawals would not be taxed or added to taxable income.
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