Are you making the most of your workplace retirement benefits? With the Canadian economy not in the best of shape, you probably shouldn’t expect a hefty raise at work this year. The good news is there are still ways to get more money when your boss won’t give you a raise. Last week we discussed workplace pension plans. With the RRSP deadline of February 29, 2016 fast approaching, it’s the perfect time to discuss group RRSPs.
What’s a Group RRSP?
A group RRSP is just like an individual RRSP you’d set up for yourself – the main difference is that it’s set up and administered by your employer. Group RRSPs make saving easy – the contributions are conveniently deducted from your paycheque . Unlike individual RRSPs, you’re not saving alone. Many employers match your contributions. Not only are these contributions tax deductible, your investments grow tax-free. Just like individual RRSPs, you can usually take advantage of income splitting with spousal contributions.
Similar to defined contribution pension plans, contributions are typically based on a percentage of your salary. For example, you may be able to contribute up to 5 percent of your salary and receive a match from your employer. If your employer offers matching, take advantage of it. That’s like a 100 percent return on your investments. It doesn’t end there, your contribution plus your employers matching contribution gets lumped together and deducted from your income thereby lowering your taxable income for that year. For instance, let’s say you contribute $300 monthly to your company group RRSP and your employer matches the whole amount, this results in a total monthly contribution of $600. This amounts to $7,200 in total contributions for the year which can then be deducted from your taxable income, thereby increasing your tax refund. If your company group plan has this benefit, you SHOULD take advantage of it – it doesn’t get any better than that! Why leave free money on the table?
Although there’s usually a limited number of investments to choose from, it’s up to you how your money is invested. You can usually choose from GICs, mutual funds and segregated funds (although you usually can’t buy individual stocks). For example, if you’re younger and you have a longer time horizon until retirement, you might decide to invest more in equities. However, if you’re approaching retirement, you might decide to invest in a balanced fund. It’s completely up to you! Fees can take a big bite out of the performance of your investments. The good news is, employers can usually negotiate lower investment fees than individual employees would be able to obtain on their own.
When you decide to leave your employer, your money is not locked in. You have the choice of transferring your funds to your individual RRSP or RRIF, buying an annuity or taken the funds in cash (this option is not advisable, as you could face a hefty tax bill).
Group RRSPs aren’t without their drawbacks. Your employer can cancel the plan at any time, putting your retirement plans into disarray. While your employer can offer matching contributions, don’t forget those contributions are considered taxable and must be reported when you file your taxes. Your employer also has the right to limit your ability to withdraw funds from your group RRSP.
Despite those drawbacks, if your employer offers a group RRSP, it’s well worth taking advantage of. If you need help figuring out your company’s group RRSP, feel free to contact our office. We can sit down with you and help determine if your workplace retirement plan is sufficient to cover your expenses in retirement.