While the majority of Canadian employees would like to have access to a group retirement plan, only 40% of employers have one in place.
If you're one of the lucky few, you should take advantage of your company's Group Registered Retirement Savings Plan (GRRSP).
In this blog post we'll cover what is a Group RRSP, how it works, and how you can make the most of this investment opportunity.
What is a Group RRSP?
A Group Registered Retirement Savings Plan (GRRSP) is a retirement savings plan sponsored by employees. It is similar to an individual RRSP, but it provides some additional benefits. It allows your employer to contribute to the plan (if desired), allows automatic deductions from your paycheck, and has lower administration fees in general.
How Does a Group RRSP Work?
Since a GRRSP is an employer-sponsored retirement plan, your employer, not you, selects the group RRSP administrator, chooses investment options, and determines whether or not the plan will be a matching one. However, the employer does not make all decisions. You get to pick your investments from a pool of investment options.
While GRRSPs vary greatly by company, some steps are consistent across all plans.
1. Employer chooses the GRRSP administrator
Your employer decides whether or not to offer GRRSP. If it decides to open one, it will select a financial institution.
2. Employer chooses the investment options
A GRRSP may include one or more investment options. The plan's investment options are determined by your employer.
3. Employer determines whether it will participate in the plan or not
There is no rule that says an employer must participate in a GRRSP. Some employers choose to contribute, while others choose not to. If your employer opts for an employer matching program, it will determine how much it will contribute. Generally, employers contribute a certain percentage of an employee’s salary, say, 3% or 5%, up to a fixed amount.
4. Employees decide whether to enroll in the plan or not
Generally, a GRRSP is not required for all employees. It is up to each individual employee whether he or she wants one.
5. Employees have control over their investments
Several investment alternatives are typical in GRRSPs. As an employee, you have the choice of selecting one of the offered options. Making your own portfolio allows you to guarantee that your group RRSP is appropriate for your long-term financial goals.
6. Contributions are tax deductible to employees
As an employee, you make pre-tax contributions to your GRRSP, typically through payroll deductions. Your employer's contributions are also tax deductible to you. Furthermore, any gains on the invested funds grow tax-free. In other words, until withdrawn, the money in a group RRSP is tax-free.
Participation in a GRRSP does not preclude you from contributing to an individual RRSP, as long as your total contribution maximum is not exceeded.
7. You get to keep the money in your GRRSP when you quit
If you leave your job, whether freely or involuntarily, you have numerous choices for accessing the money in your GRRSP.
- Cash Out: Since group RRSPs are not locked in, you can withdraw the money as cash at any age. Keep in mind any withdrawal will be regarded as income and taxed at your marginal rate. Depending on your province and annual income, you may end up paying as much as 48% in taxes.
- Transfer to RRSP: You can put the money into an individual RRSP if you have one. Your assets will continue to grow tax-free, but you must pay a departure fee to the current provider.
- Transfer to RRIF: Transferring your GRRSP to a registered retirement income fund (RRIF) is a suitable alternative if you wish to get immediate income. A RRIF, like an RRSP, is a tax-deferred savings vehicle. The key distinction is that you contribute to an RRSP, whereas an RRIF is used for withdrawals.
- Buy an annuity: This is another option that may be available if you want to receive immediate income. With an annuity, you receive a fixed income on a regular basis over a certain period. In return, you let the annuity provider control your funds.
What are the Benefits of a Group RRSP?
A group RRSP offers several benefits, including:
- Lower Fees
A group RRSP typically has lower fees compared to a personal RRSP.
- An Immediate Tax Break
Your taxable income is reduced by the same amount for each dollar you contribute to your group RRSP through payroll deductions. Furthermore, no money will be taken out for taxes if you do not touch your GRRSP. It implies you'll have more money to invest. Also, if you invest for retirement, you will almost certainly be in a lower tax band when you withdraw than you are today.
- Employer Matching Option
Your employer is not permitted to contribute to your individual RRSP. It can, however, contribute to your group RRSP if it so desires. In turn, a matching plan allows you to save more money for retirement.
- Automatic Payroll Deductions
Not able to save as much as you would like for retirement due to poor spending habits? If so, a group RRSP may be right for you. Most plans let employees contribute through payroll deductions, taking the discipline out of the equation. Just sign up for the plan and you will save a fixed amount for retirement every month.
Do Group RRSPs Allow for Spousal RRSPs?
Some group RRSPs offer spousal RRSP options, while others do not. Check with your employer to find out if it allows you to make contributions to your spouse’s or common law partner’s RRSP. If it does, your contributions will be tax deductible to you.
What is an RPP?
An employer establishes a Registered Pension Plan (RPP) for the benefit of its employees. The employer selects the financial provider to operate the plan, which must be registered with the Canadian Revenue Agency (CRA). An RRP, like an RRSP, can provide several investment possibilities, but your employer chooses how the money in your RPP is invested rather than you.
Your employer is obligated to contribute to your RRP, and you may be able to contribute as well, depending on your plan. The overall contribution ceiling is 18% of pre-tax earnings, up to the year's maximum amount. All donations, both your employer's and your own (if allowed), are tax deductible. As long as your money is in an RPP account, it grows tax-free. After you retire, you are free to spend the money however you see fit.
A defined benefit RPP or a money purchase RPP are both types of RPPs. While both operate in the same manner, a defined benefit RPP is more risky for the employer. A defined benefit RPP provides the employee with a predetermined pension regardless of the performance of the plan's investments.
A money purchase RPP does not have a specific pension amount. How much money you will receive upon retirement depends on your annual salary and how the investments perform.
Group RRSP vs RPP?
Both RRSP and RPP offer tax benefits and are designed to provide employees with retirement income. However, there are three main differences between the two.
Unlike an RPP, a GRRSP is not subject to provincial and federal benefits standard legislation. As such, it is easier to administer.
Group RRSPs are more flexible than RPPs. With a group RRSP, you can withdraw money without any tax implications for these two reasons:
- The Home Buyer’s Plan (HBPP)
You can withdraw up to $35,000 from your group RRSP ($70,000 for a couple) for building or buying a qualifying home if you meet certain requirements. To avoid taxation, the borrowed amount must be repaid within 15 years.
- The Lifelong Learning Plan (LLP)
You, your spouse or common law partner can use your RRSP money to pay for tuition and other educational expenses. The LLP allows you to withdraw up to $10,000 per calendar year, with a lifetime maximum of $20,000. You must repay the borrowed sum within a certain time frame to avoid taxation.
Apart from the HBPP and LLP, you can withdraw funds from your Group RRSP for a variety of personal reasons. However, these withdrawals will be taxed. Keep in mind that withdrawing funds from a group RRSP is not as simple as withdrawing funds from a bank account. Also, each withdrawal means less money when you retire. Nonetheless, in the event of a financial emergency, you can access your retirement assets early.
An RRP, on the other hand, is a locked-in account. You are not permitted to withdraw funds unless you retire, die, or have your employment terminated.
A defined benefit RPP promises a guaranteed lifelong pension for life. But with a group RRSP, you do not get any such assurance.
How to Switch From an RPP to an RRSP?
As an employee, you can initiate a switch from an RRP to an RRSP only when:
- the employer has terminated your plan
- you are terminated from employment
If you pass away before retirement, your beneficiary can transfer the funds to a RRSP.
In the event of the termination of the plan, you can make a one-time transfer from an RPP to an RRSP, provided you are aged 71 or less and your plan is not locked-in. If you have a locked-in plan, you can only switch to a Locked-In Retirement Account, Lock-In Retirement Income Fund, or Life Annuity.
Your employer, however, can initiate a switch from an RPP to a GRSP at anytime. But since an RPP is subject to a lot of legislations, switching to a GRSP is a fairly complicated process.
You can save for retirement tax-free with a group RRSP. You may be able to contribute through payroll deductions depending on your plan. If your employer so desires, it may match your contributions up to a certain amount. All contributions are exempt from payroll taxes, and the funds can be accessed in a variety of ways after retirement.
Looking to setup a group benefits or group RRSP plan at your company? Reach out to a Dundas Life licensed advisor today to get started!