Group RRSPs: How They Work
Dexter Nieva Balangue
Strategic Client Partnership Manager | Unlocking Growth Potential in Businesses Through Strategic Investments
Are you planning to buy and live in a spacious condo with scenic beach views in Florida during your retirement??
Or will you downsize and travel the world with your significant other?
Whatever your retirement plans, start saving to make the most of them.
An easy way for employees to save is to take advantage of employers' free money through retirement savings plans like a Group Registered Retirement Savings Plan.
Just recently heard of them??
This article has all the lowdown on group registered retirement savings plans, commonly referred to as group RRSPs.
What are group RRSPs?
A Group Registered Retirement Savings Plan, sometimes known as a Group Registered Pension Scheme, is an employer-sponsored plan for eligible employees.??
Payroll deductions are automatic and are redirected to investments of the employee’s choice to encourage saving.
The deducted money is tax-free, and the employer contributes to matching the employee contributions. So, the employee is basically getting free money.
What’s in it for the employer??
Well, they get a tax break and a competitive advantage to attract and retain high-value employees. Plus, matching RRSP contributions isn’t a prerequisite. Read on for more information on how a group registered retirement plan works.
How Group Registered Retirement Income Funds Work
A group RRSP is registered under the Canada revenue agency and is equivalent to 401(k) plans in other countries. It’s similar to a personal RRSP in that you'll get control over your investments and have similar investment options.?
However, group RRSP policies vary from one company to another.
Some companies' employers may not match RRSP contributions, while in other organizations, employee eligibility for group registered retirement income funds depends on your tenure.
The employees choose whether to enroll to a group RSSP or not, and they get control over investment decisions. Additionally, they can still be part of a separate group plan or even an individual RRSP if they don’t surpass the maximum contribution limit.?
What are the advantages of group RRSPs?
Check out the perks you are missing out on if you are eligible but hesitating to join group RRSP:
Lower Management Fees
Investment management companies handling group RRSP usually charge investment management fees(IMF) for cash and investment administration. These fees vary but range between $25 and $200 annually.
Although you won’t pay tax on contributions, the fee directly impacts your investment return rate. For instance, if you earn 5% in returns, a 1.5% IMF rate will reduce them to about 3.5%.
Signing up as a plan member for a group registered retirement income fund program gets you lower management fees. Financial institutions divide the total fee amount among members, reducing the principal charge. And it’s cheaper for the employer because administrative costs go to the employees while they only put in the employer contribution.?
Excellent Tax Relief?
If you loathe paying taxes but don't want the CRA in your case, a group RRSP is the way to go. You'll get immediate tax relief with each contribution.
You lower your income tax by an equal amount for each dollar you contribute until you withdraw your taxable benefit. And since you'll probably be in a lower tax-deductible bracket by maturity, you get even more tax savings.??
The result??
Your employees' savings grow tax-free, and you'll get tax deductions at maturity, meaning good money for the golden years.
Removes the Guesswork (and Discipline Out of Saving)
?Ever feel like no matter what strategy you try, you can't save money?
You’re not alone!?
About 48% of Canadians aren't confident they're saving enough. And it's not because they want to struggle on rainy days. But it's due to personal and external reasons like limited saving skills, increased living costs, and the need for instant gratification.
If you also find it challenging to save for similar reasons, a group registered pension plan will be a game-changer for you. Payroll deductions are automatically made and redirected to your investments.?
So, whether your car needs new tires or your teenager wants a new iPad, you'll have to work with the amount that hits your account after contributions.
This eliminates the need to learn the A-Z of saving (although it’s wise to) and imposes a saving culture in your organization. Also, once the plan member makes the primary investment decisions, the rest is up to the investment manager.?
Additionally, you'll never have to worry about rainy days again because your savings aren't just sitting pretty in an account. A company-sponsored plan ensures they're accumulating thanks to the investment options they're automatically redirected to.
There are Tax-Free Withdrawal Options
With most Canadian registered plans, one can only withdraw the money at retirement plan maturity. Early withdrawals are subject to penalties.?
Although group RRSPs work similarly, there are tax-free withdrawal options. If an employer wants to buy a home, they may access part of the saved amount for a down payment on a home buyer’s plan, meaning they won’t pay taxes.?
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Those looking to further their studies can also access tax-sheltered funding through the lifelong learning plan. However, to access the home buyer's plan and the registered education savings plan, the money must have been in the retirement savings plan RRSP for at least six months.?
No Vesting Requirements
Most Canadians must make regular contributions for at least five years before they can officially own an employer’s contributions. Group RRSP save them the waiting period because they have no vesting requirements.?
Favourable Terms Regarding Unused Contributions and Spousal RRSP
Another key advantage of group RRSP is that you get more control over contributions. Unlike with most plans, your unused contributions from a particular year are carried forward with no time limits. A group RRSP also allows spousal contributions.?
Managing Multiple RRSP Accounts: Why Consolidation is the Way to Go
As noted, being part of a Group registered retirement income fund program doesn't limit you from joining individual RRSPs. And it's beneficial because it means you can put more money into your retirement savings.?
However, having a group plan and an individual RRSP account means increased annual administration fees for the stocks, mutual funds, and other similar investments.?
You can avoid this by consolidating your group RRSP and personal RRSP accounts. Besides reducing investment management costs, consolidating your RRSP accounts accrues you the following advantages:
Multiple registered pension plan accounts have perks, but they also make tracking and managing your investments difficult. This is because different investment managers have different processes.?
Consolidating your RRSPs means working only with a single financial institution. And with payroll deductions done with one company and investments in one place, it's easier to evaluate the tax return from your maximum amount. You also effortlessly weed out investments that are not right for you.
Consolidation also simplifies your life as you only need to acquaint yourself with the retirement plan of a single company.
As mentioned, contributions to RRSPs are usually tax-free until retirement age. Withdrawing returns from multiple RRSPs might lead to a higher income tax and might even eat into old-age security benefits.
Consolidating your RRSPs to one account means you work with your financial institution to harmonize your RRSP contributions and withdrawals for the maximum tax deductible.
Generating your returns from multiple RRSPs when you finally retire means you need to balance withdrawals and taxable benefits from multiple sources.?
Each RRSP has withdrawal policies that you may need to learn about for income tax purposes. This makes generating your returns quite a process.?
Consolidation lets you work with a single investment management company, so access to your golden years' benefits is effortless.?
That said, it's best to stick to one group RRSP account. And if you already have more than one account, consolidate them. Only consider having multiple accounts if
Does a Group Registered Pension Plan Offer a Spousal RRSPs Option?
A spousal RRSP is a deferred profit sharing plan for couples. It's applicable when one spouse earns more and has achieved their maximum contribution limit.
The spouse earning less registers their own RSSP account, while the one making more in their career contributes to it. This evens out the total contribution and lowers the tax deductible because the couple can withdraw and split the tax return evenly at retirement age.?
Spousal RRSP is an excellent way to help your low-income earning spouse build their retirement savings. It’s an especially ideal savings plan if your spouse lacks an income or if you plan to retire early and would like to enjoy tax relief despite being in a high tax bracket.
So, do group RSPs offer spousal group registered retirement income funds? Just as? contributions to company-sponsored plans aren't mandatory with group RRSPs, so are spousal RRSPs. Asking your employer is the best way to find out if your RRSP has a spousal contribution option. And if they do, you and your spouse must meet the following requirements to be eligible:
A spousal group plan is also subject to the RRSP contribution deadline. One can only withdraw employee contributions from a spousal RRSP three years after the start date. If the spouse withdraws before, the contributing partner has to cover the income tax and vice versa. If you separate before retirement, the returns and investment funds are only divided equally if you are legally married.
Getting Started with Group Registered Retirement Savings Plan
Group Registered pension plans are one of the best strategies to secure your golden years. The automatic payroll deductions prevent you from ever procrastinating on saving.
Even better, your money isn't just whisked away to a savings account. It's put into investments, meaning your money gets to work for you.
The best part??
You get free money from your employer's matching contributions. And when you work with a reliable investment fund manager like Open Access, you don't have to lift a finger.?
Our advisors handle everything from administrative tasks to RRSP maintenance.?
Do you believe a group registered retirement savings plan is the right solution for you and your employees? ?
Get in touch with our advisors, who’ll answer questions and break it all down for you about group RRSP from scratch.