Deferred Salary Plans: what you need to know to take your leave
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Imagine having 365 days to do what you want, when you want.
That’s the freedom of a Deferred Salary Plan (DSP).
If you’re a seasoned educator, you’re probably more than familiar with the DSP (perhaps you’ve even taken one). However, if you’re in the early years of your education career, you may not have had the chance to familiarize yourself with this amazing benefit.
Here’s how a Deferred Salary Plan works:
- It is technically an ‘unpaid year off’—yet you still get paid (it’s classified as unpaid because technically you’ve already paid for it by the time you take your year off—keep reading to see what we mean)
- Once you have started to participate in your chosen Deferred Salary Plan (i.e. 3 over 4, 4 over 5, 5 over 6, etc.), you will then begin ‘paying’ for your year off
- Paying for your year off involves your total salary being divided evenly over a set number of years at a reduced rate using a specific formula
For example, if you decide to take a 4 over 5, you would work full-time for 4 consecutive years while collecting 80% of your salary—the remaining 20% would then be banked away for year 5.
In year 5 (your year off), you would also receive 80% of your salary, which is the accumulation of those 20% deductions over the previous 4 years.
For example:
100% of your salary ÷ 5 years until you take your leave = 20% deduction over 4 years.
4 years of deductions x 20% = 80% in year 5 (= 4 over 5).
Who can take a Deferred Salary Plan?
If you’re in your first year of working in education, you’ll need to defer those Deferred Salary Plan dreams for the time being, but only for a few years. That’s because the typical rule is that you have to complete at least 3 years of continuous service as a permanent employee of a participating school board or district.
Of course, this may differ from board to board, so be sure to check with your own board for the specific DSP policies and guidelines that are applicable to you.
When is the best time to take a deferred salary leave?
It’s really dependent on you and your financial situation.
Some education members prefer to take advantage of a DSP in the early stages of their career—before they have kids and financial obligations such as paying a mortgage. While others prefer to wait until they’re higher up on the pay grid (and that reduced salary is a little easier to manage).
Marc and Julie Goulet are two schoolteachers from Northern Ontario who were able to manage taking their deferred salary leave as a 1 over 2. Read about Marc and Julie’s Deferred Salary Plan.
What about pension contributions while participating in a DSP?
You would still be making regular contributions to your pension as though you were receiving your full salary. As a result, you would have very little, if any, extra RRSP contribution room (as it is used by your large OTPP contributions to significantly reduce your taxable income).
How do I plan for a deferred salary leave?
The first step is to create a budget, as this will give you a realistic expectation on whether or not you’ll be able to balance all of the regular expenses you still need to cover while living on a reduced income for a number of years.
Can you live on 80% of your salary for 5 years? Take your 4 over 5 for a test drive now by doing a bit of financial planning using our handy budget calculator.
If your budget reveals a real challenge for making your 4 over 5 dreams come true, we can help.
With over 45 years of making Deferred Salary Plans happen—we can customize a savings plan to suit your own specific goals and financial situation. Simply decide on the destination and then leave it to Educators Financial Group to help get you there.
