A Group RRSP is simply a collection of individual RRSP accounts managed on a group basis by an employer. Like an individual RRSP, the group RRSP offers tax-deductible contributions and tax-deferred growth. However, there are additional benefits to jumping on the bandwagon when it comes to group RRSP plans.
If your employer offered you an additional 3% annual raise on your salary, would you accept it? My guess is that your response is: “Yeah, bring it on!”.
If that’s the case, then it is a wonder that many employees still decline to participate in their employer-sponsored group RRSPs even when the employer would be matching their contributions dollar-for-dollar up to a certain percentage of their annual income, or the employer may contribute a certain percentage for every dollar contributed by the employee up to a maximum of their base pay.
In general, employer contributions may range anywhere from 2% to 6% or more of your annual salary.
Say, for instance, you earn $60,000 per annum, and your employer matches your contributions dollar-for-dollar up to 6% of your annual income. If you contribute 6% of your annual salary ($3,600), your employer would chip in an additional 6% (ie. $3,600) for a total of $7,200 contributed to your RRSP for the year. This is like you receiving an annual salary increase of 6%!
On the flip side, let us assume that you decide to not take advantage of your employer contributions and do not contribute at all to the group RRSP, you will have just forfeited a maximum benefit of $3,600 or in other words, declined a 6% raise in salary for the year. Talk about leaving “free money” on the table!!
As much as this may sound implausible, it does occur more often than one would imagine. Estimates show that over $3 billion potential employer contributions are being missed by Canadian employees because they are not making the required matching contributions to qualify for them.
Advantages of a Group RRSP
In addition to the “free money” benefit provided by a lot of group RRSPs as illustrated above and other general RRSP benefits listed here, other advantages include:
1. Lower Administration or Investing Fees: Because you are investing as a group, investing fees are usually lower due to the higher bargaining power of the group. In general, as more money is invested, investing fees become lower, resulting in significant savings over time.
2. Access to Expert Money Managers: For a little or no additional cost, group RRSPs afford you the benefit of having top-of-the-line investment professionals manage your funds for you.
3. Automatic Savings: When contributions are automatically deducted from your paycheck on a biweekly or monthly schedule, it helps you to save for your future without having to put too much thought into it. It is a simple way to ‘trick’ yourself into “paying-yourself-first”.
4. Cashing Out: While rules for taking money out of the plan may vary from employer to employer, unlike in a pension plan, your money is not locked in. The money belongs to you, and if you leave the job, you can transfer the money to your individual RRSP, convert it into a Registered Retirement Income Fund (RRIF), or cash out.
5. Lower Minimum Payments: There is a lower barrier as to the minimum amount you need to contribute in order to participate in the fund. You may also be able to participate in investments that are usually not available to an average individual investor.
6. Less Paperwork: The group administrator takes care of the required annual tax reporting and other paperwork.
Disadvantages of a Group RRSP
1. Limited Investment Options: While there are investment options available to an employee participating in a group RRSP, they are usually limited to what is offered by the financial institution administering the plan. For example, individual stocks may not be available for purchase.
2. Taxable Benefit: When your employer contributes to or matches your group RRSP contributions, it increases your income and is considered a taxable benefit. However, when filing your taxes, you can deduct all RRSP contributions (up to $26,230 for 2018) in order to get a tax refund if taxes have been deducted.
3. Limited Withdrawal Options: You may not be able to withdraw from the funds (or may be limited to what you can withdraw) while you are still working with the firm.
4. Plan Cancellation: Your employer may cancel the group RRSP at any time. If this occurs, you can simply transfer all your funds to an individual RRSP or RRIF, buy an annuity or take cash.
In summary, participating in a group RRSP where your employer matches your contributions is a sound investment strategy. And if possible, contribute your maximum – do not leave free money on the table!
Related: All You Need To Know About The RRSP