You know you should do it – but saving for retirement isn’t always at the top of your to-do list. It’s easy to forget about emails from HR reminding you to sign up to your employer’s group registered retirement savings plan (RRSP). But the earlier you start saving, the bigger the benefits you’ll enjoy over the long term.
“If you’re enrolled in a group RRSP through work, chances are you’re saving more for retirement than most Canadians. If your plan is voluntary and you’re not taking advantage, you’re missing out on a huge opportunity.” So says Jim Yih, a group retirement consultant and founder of RetireHappy.ca.
But, what exactly is a group RRSP and why should you join one if you can? We’ll help by answering these questions:
What is a group RRSP?
A group RRSP is a savings plan offered through an employer. It’s similar to an individual RRSP, but with the added benefit of:
- allowing you to have savings deducted from your paycheques into a range of investments, and
- receiving matching contributions (up to a certain limit) from your employer – if it is offered.
How does a group RRSP work?
A group RRSP is like owning a common investment. You put in your small contributions, which your employer may match. And all contributing employees do the same. A Group RRSP is designed to encourage you to save by contributing through payroll deductions. All contributions (both yours and your employers) are tax-deductible to you – and all investment earnings are tax-sheltered.
A small contribution is usually all you need to start investing.
If your plan allows it, you can:
- make one-time contributions,
- transfer money from another financial institution at any time, or
- sign up for regular and automatic payroll deductions.
You can choose your investments.
If you’re offered a choice among several investment options, it’s up to you to make your own investment decisions. Some employers offer tools that you may find helpful. Make sure you’re checking contributions against your available RRSP contribution limit.
What are the benefits of a group RRSP?
1. It can cost less to manage your funds.
When you buy in bulk, you get a better deal. The same concept applies to a group RRSP. When a group of plan members choose from the same funds, your employer can negotiate competitive fund management fees. So, in comparison to an individual RRSP, you end up paying less to manage your savings plan.
2. You’ll get a tax break.
Contributions to your RRSP reduce the income tax you pay. And if you contribute through payroll deductions, your contributions are invested before tax is deducted. This allows you to realize the savings on the spot.
For example, assuming you are in a 40% tax bracket, a $25 contribution will cost you only $15 net. How? Because of the effect of the tax break when you make your contribution. Income tax on investment earnings in your group RRSP will be deferred until you withdraw them. (Which will presumably be after you retire and are in a lower tax bracket).
3. It takes the guesswork (and discipline) out of saving.
If your employer allows for it, sign up for automatic payroll deduction. This can take the monthly decision right out of your saving equation. And it also increases your likelihood of investing regularly.
Yih says, “Most people don’t have the natural discipline to save." So, if it weren’t for a group RRSP, many people just wouldn’t save for retirement. He continues, “I’ve heard many employees admit they wouldn’t have the discipline to save if it wasn’t for automatic deductions from their paycheques.” And studies show retirement savings rates are higher among those who are members of workplace savings plans.
What’s the best way to manage more than one RRSP?
If you have more than one RRSP and don’t want to manage multiple accounts, consider consolidating your savings. Many plans allow you to move other registered savings into your group RRSP. This can help you:
- manage your investments in one place, and
- keep your management fees low.
Do group RRSPs offer a spousal RRSP option?
If you’re married or have a spouse, check to see if your employer offers a spousal RRSP option. If they do, consider contributing on behalf of your spouse. The biggest advantage here is that it enables you to split retirement income between the two of you. This can potentially reduce the amount of tax you pay in total. Plus, you still get a tax break from your contribution.
Who can help with your savings and investments?
An advisor can help you keep track of your finances and create a plan that suits your needs. They can also answer questions you may have about your investment options. Find a Sun Life advisor today.
Read and watch more:
- The hidden costs of early RRSP withdrawals (video)
- 6 things you may not know you can do with your RRSP
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.