I know that the RRSP season is over and most people are tired of hearing
about RRSP's and are now thinking about their tax return. One common ailment at this time of year is the pain that
is felt upon completing your tax return and the surprise at just how much tax you pay. Many Canadians vow to do
something about it. One good vehicle for saving for your retirement and for reducing taxes is the Group Registered
Retirement Savings Plan.
The purpose of this article is to show you why you may want to contribute
to such a plan if one is offered where you work, and if one isn't offered, to encourage you to bring up the topic
of establishing a group RRSP with your personnel department. There are many advantages for both you and for the
Group RRSP's are growing in popularity. According to a Benefits Canada report, group
assets totaled $22.6 billion in 1999 and are expected to grow to $50 billion by the year 2004. There are several
reasons for this growth. The first has to do with demographics and aging. A greater portion of society is reaching
the age where retirement is important to them and they are taking advantage of group plans. Another reason is the
decline in popularity of defined benefit pension plans. These plans are subject to ever increasing legislation,
high costs, administrative demands and potential future funding liabilities for the employer.
Advantages for the employee:
The biggest difference between contributing to a group RRSP and contributing
to an RRSP on your own is that with the group RRSP, the contributions are deducted at source and you are not taxed
on these contributions. In other words, you get an immediate tax deduction.
With some group plans, the employer may choose to encourage their employees
to contribute to the group RRSP by matching contributions by a certain percentage. If the employer matches your
contributions by 5 or 10 percent it's like earning an additional 5 or ten percent on your investments. There are
not too many good reasons not to get involved in a group plan when the employer does this.
There are several other advantages to group plans. We've all heard the
slogan "pay yourself first". This is exactly what you are doing when you allot a percentage of your pay,
or a fixed dollar amount per pay period to your RRSP.
It is also a disciplined way to invest which allows you to take advantage
of "dollar cost averaging".
Formal pension plans may have certain provisons with regards to the
vesting of pension benefits and what happens to contibutions when an employee leaves the firm that are confusing
and often not in the best interest of the employee. When you make a contribution to a group RRSP there is no question
about who owns the contibution and what you can or can't do with it. You can do what ever you want with it - transfer
it, redeem it, add to it. Note that there may be some locking-in provisions or restrictions on the transfer of
amounts contributed by your employer.
Most fund companies have a lower minimum contribution limit for their
group plans. Some are as low as $25 per fund per pay.
The financial advisor who works with your firm on the group RRSP is
normally available to you for your other personal financial planning needs.
Advantages for the employer:
The group RRSP is a free benefit that the employer can provide to their
employees. With most mutual fund companies there is no set-up fee, no trustee fee and no termination fee.
There are many advantages to a group RRSP over a formal pension plan
in terms of cost and administration. If the company has an existing formal pension plan, the group RRSP can complement
If the employer contributes to the employee's RRSP, this goes a long
way towards attracting and retaining employees.
One of the biggest advantages is the fact that the employer is not liable
for guaranteeing a specific amount of income when an employee retires.
Lastly, the bulk of the administration is carried out by the fund company.
Many Canadians find it difficult to save for their retirement. This is
especially so when you have to first earn money, pay tax on it, then try to save. Many people also find it difficult
to top up an RRSP at the end of the year or make RRSP loan payments. The group RRSP can be a godsend for investors
who experience these problems.