By Jillian Stinson
A group RRSP is a strength in numbers. Participating in it means ensuring that you save for retirement while benefiting from welcome tax relief. And it costs less than an individual plan.
Saving for retirement may not always be at the top of your priorities. It’s easy to forget the emails from Human Resources reminding you to enrol in your employer’s Group Registered Retirement Savings Plan (RRSP).
However…
“If you don’t take advantage of your employer’s group RRSP, you’re missing out on a huge opportunity. But if you’re already participating, you’re probably saving more for your retirement than most people in Canada. says Jim Yih, Group Retirement Consultant.
What is a group RRSP, and why should you join as soon as possible? To help you, we will answer the following questions:
How does the group RRSP work?
Participating in a group RRSP is like owning an investment. You make a small contribution, and your employer can match it. All participating employees do the same. This plan promotes savings since the money is withheld at the source. All contributions (yours and the employers) are tax-deductible, and all investment income is tax-sheltered.
In general, all it takes to start investing is a small contribution.
If your diet allows it, you can:
make occasional contributions;
transfer money from another financial institution at any time;
establish periodic contributions through payroll deductions.
You can choose your investments.
If you have several investment options to choose from, the decisions are yours. Some employers offer tools that you might find helpful. Note, however, that the plan administrator is not required to check whether you are making excess contributions. You must therefore ensure that you respect your contribution limit.
What are the advantages of the group RRSP?
- Managing funds can be less expensive.
Buying in bulk brings better prices. The same principle applies to the group RRSP. If a large group of plan members chooses from a single list of funds, your employer can negotiate better management fees. Therefore, managing this plan costs you less than managing an individual RRSP. - You are entitled to tax relief.
Contributions to your RRSP reduce your tax payable. Moreover, if you contribute using payroll deductions, these are invested before the conclusion. This way, you realize an immediate tax saving.
For example, if your tax bracket is 40%, a $25 contribution will only cost you $15 net. Why? Due to tax relief. The tax on your investment income in the group RRSP will be deferred until you make a withdrawal. (And it’ll probably be when you retire, so you should be in a lower tax bracket.)
- You save without asking questions or imposing discipline on yourself.
If your employer offers it, take advantage of automatic payroll deductions. This way, you will no longer have to make the conscious decision to save each month. You will also be more likely to invest regularly.
According to Jim, “the discipline to save doesn’t come naturally to most people.” If they didn’t participate in a group RRSP, many wouldn’t put any money aside for their retirement. “Many employees have admitted to me that they would not have the discipline to save if the money was not automatically deducted from their pay,” he adds. Moreover, studies show that participants in a savings plan offered by the employer finance their retirement more.
What’s the best way to manage multiple RRSPs?
Consider consolidating your savings if you have more than one RRSP and don’t want to manage multiple accounts. You can transfer funds from other registered plans into your group RRSP in many cases. So you can:
manage all your investments in one project;
reduce your management costs.
Watch: Should you pool your savings? (video)
Does the group RRSP allow contributions on behalf of the spouse?
Do you have a spouse or partner? Check if your employer offers a spousal RRSP, in which you can contribute on behalf of your spouse. In this case, the main advantage you will benefit from is splitting your couple’s retirement income. This could reduce the total tax payable. In addition, this type of contribution gives you tax relief.
