The Group Registered Retirement Savings Plan is a terrific vehicle for saving for your retirement plus reducing taxes.
The purpose of this article is to:
- show why you would want to contribute to such a plan if it were offered by your employer, and
- if one isn’t offered, to encourage your employer to establish a group RRSP.
There are many advantages for both you and for the firm.
Group RRSP’s are growing in popularity. There are several reasons for this growth. The first has to do with demographics and aging. A greater portion of society is reaching the age where retirement is important to them and they are taking advantage of group plans. Another reason is the decline in popularity of defined benefit pension plans. These plans are subject to ever increasing legislation, high costs, administrative demands and potential future funding liabilities for the employer.
Advantages for the Employee:
- Here is the biggest difference between contributing to a group RRSP versus contributing to a personal RRSP. – The group RRSP contributions are deducted at source and you are NOT taxed on these contributions. In other words, you get an immediate tax deduction!
- Some employers choose to encourage their employees to contribute to the group RRSP by matching contributions by a certain percentage. If the employer matches your contributions by 5 or 10 percent it’s like earning an additional 5 or ten percent on your investments; or in effect “Free Money”.
- “Pay Yourself First” is exactly what you are doing when you contribute a percentage of your pay, or a fixed dollar amount per pay period to your RRSP.
- This disciplined approach to investing allows you to take advantage of “dollar cost averaging”.
- Most plans allow you to make spousal contributions.
- Formal pension plans may have certain provisons with regards to the vesting of pension benefits and what happens to contibutions when an employee leaves the firm that are confusing and often not in the best interest of the employee. When you make a contribution to a group RRSP there is no question about who owns the contibution and what you can or can’t do with it. You can do what ever you want with it – transfer it, redeem it, add to it. Note: There may be some locking-in provisions or restrictions on the transfer of amounts contributed by your employer.
- Most companies have a lower minimum contribution limit for their group plans. Some are as low as $25 per fund per pay.
- The financial advisor who works with your firm on the group RRSP is normally available to you for your other personal financial planning needs.
Advantages for the Employer:
- The group RRSP is a free benefit that the employer can provide to their employees.
- There are many advantages to a group RRSP over a formal pension plan in terms of cost and administration.
- If the company has an existing formal pension plan, the group RRSP can complement it.
- If the employer contributes to the employee’s RRSP, this goes a long way towards attracting and retaining employees.
- The biggest advantage is the fact that the employer is not liable for guaranteeing a specific amount of income when an employee retires.
- The bulk of the administration is carried out by the Group RRSP provider.