Group RRSPs: How they work

03 November 2018 by National Bank
group RRSP

If you work for a company that offers a group RRSP program, you’re in luck. Contributing to a group RRSP will not only allow your retirement savings to grow, but to accumulate tax-free. Read this short guide to better understand how group RRSPs work, and the benefits of joining one.

What are group RRSPs?

A group registered retirement savings plan (RRSP) is a company-sponsored plan that the employer offers to all eligible employees. Each employee has their own RRSP account and can choose how to invest their money.

How they work

Not all group RRSPs are the same; the way they work can vary greatly from one company to the next. In some cases, an RRSP plan may only be offered to employees after they’ve been with the company for a specified period.

Generally, employees can choose whether or not to enroll in a group RRSP. If you do decide to enroll, the amount you choose to contribute to the plan will automatically be deducted from your pay cheque. You’ll also have control over your investments, and get to create a portfolio that’s suited to your investment goals.

Enrolling in a group RRSP doesn’t prevent you from investing in a personal RRSP, as long as you stay within the total contribution limit (18% of your earned income from the previous year to the maximum amount set each year, plus any unused contribution room from previous years).

If you ever leave the company, you’ll get to keep the money that you contributed (and, if applicable, your employer’s contributions). You’ll be able to transfer your savings to your own personal RRSP, or to a registered retirement income fund (RRIF) once you’ve reached retirement age.

The advantages of joining a group RRSP

“The two biggest benefits of joining a group RRSP are the discipline of saving that it imposes on the employee, and the tremendous savings it offers,” says Jean-Philippe Bernard, National Bank Financial Wealth Management Advisor. “With a group RRSP, employees who don’t have a natural inclination to save are forced to do so through payroll deductions. Plus, they benefit from lower management fees.”

Because all the employees’ RRSPs are pooled, this results in lower management fees. Management fees charged on a large group plan can be less than 1% compared to those charged on individual RRSPs (more than 2%).

What’s more, because the money is automatically deducted from their pay, employees can make regular contributions to their plan instead of being limited to making one lump sum contribution each year.

Another benefit of group RRSPs: contributors receive an immediate tax credit on their contribution as soon as it comes off their paycheque—meaning they don’t need to wait until they file their tax return to get it.

What part does your employer play in all this?

Employers are the ones who set up a group RRSP for their employees, and who choose the financial institution through which the plan is offered. Among other things, it’s the employer’s duty to give employees all the information they need to make sound investment decisions, and ensure that they have a sufficiently wide range of investment options to choose from.

Employers may offer to match employees’ contributions at a certain rate. A company may also suspend its employer-match contributions at any time.

“An employer’s contributions are tax deductible for the employee,” adds Jean-Philippe Bernard. “In some cases, an employer may choose to match their employees’ contributions dollar for dollar. That means the employee can double their retirement savings, and all the while, their tax savings go up. When you consider this, a group RRSP is a major bonus.”

Given the advantages of group RRSPs—they allow employees to save for retirement, get free money through matching contributions, and benefit from instant tax savings—they’re often regarded as an attractive work benefit. Flexible and easy to set up, a group RRSP can be an asset for companies that want to attract and retain talent.

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