Prioritizing Your Group RRSP is Key

Aoife O’Reilly

In this article, we differentiate between a standard RRSP and a Group RRSP. We also discuss the benefits of Group RRSPs and how they can help you prepare for a comfortable retirement.

What is a RRSP?

A registered retirement savings plan (RRSP) is a type of retirement savings vehicle that allows you to deduct your annual contributions from your taxable income. A RRSP enables you to grow your investments on a tax-deferred basis until it is time to draw down your savings to supplement your retirement income.

1: How does a RRSP work?

Let’s look at John, an employee with a marginal tax rate of 25%, to see how he significantly benefits from having a RRSP. Let’s assume John’s return rate is 10% when calculating his investment return.

1.1: RRSP Income tax deduction:

John makes $60,000 per year and decides to invest $5,000 into his RRSP account. His taxable income after his RRSP contribution is $55,000 for that year. This leaves John with $1,000 extra in tax-free income. i.e., his $5,000 taxable income deduction at 25% marginal tax rate gives him $1,000 additional tax-free earnings.

1.2: Tax sheltered growth:

RRSP

On January 1st, John had $5,000 in his RRSP account. Over the course of the year John achieves an annual rate of return of 10% on his investment. As of December 31st, John’s RRSP account now has $5,500. John will not pay tax on his $500 investment return until he makes a withdrawal from his account. Once John is ready to make a withdrawal from his RRSP account, the entire amount of his withdrawal will be considered taxable income. John will pay tax at his marginal tax rate which tends to be lower in retirement years versus during his working years, with higher income making this scenario a tax-advantageous investment strategy.

Non-Registered Investment

On January 1st John had $5,000 in his non-registered investment account. Over the course of the year, John achieved an annual rate of return of 10% on his investment. As of December 31st, John’s non-registered investment account now has $5,500. John will pay tax on his $500 investment return when he files his income tax for the taxable year. His $500 investment, at a 25% marginal tax rate, leaves him with $100 in income tax. John will owe $100 of tax from his investment return, leaving him with $400 net investment return.

2: Why should you prioritize contributing to your Group RRSP?

Most employer-sponsored Group Retirement Saving Plans match employee contributions. The typical Group RRSP match in Canada ranges between 3% and 7%. Most matches are 1:1 (employee: employer) meaning that for every dollar that the employee contributes the employer will also contribute a dollar to the employee’s retirement plan up to the maximum match percentage. For example, John makes $60,000/year. John’s company offers a 1:1 match up to a maximum match of 5%. If John contributes $3,000 to his Group RRSP, John’s company will also contribute $3,000 to his RRSP. John will then have a total of $6,000 in his Group RRSP account at the end of year one, net of his investment return. This is the equivalent of having a guaranteed investment return of 100% over and above John’s actual investment return. Most Group RRSP plans offer significant discounted fees in comparison to the retail fees that would be offered for your personal RRSP investment. Lower fees mean more money stays in your pocket – what could be better?

3. Additional ways to maximize your Group RRSP contribution

Consider rolling over your bonus into your Group RRSP plan. This will allow you to reduce your taxable income for that given year and help accelerate the pace at which you are accumulating wealth. Make lump sum contributions to your Group RRSP via your online banking to accelerate your savings. Click here for more information on how to make a lump sum contribution. Take advantage of the reduced fees that a Group RRSP offers. You can even consolidate your immediate family’s RRSP accounts into your Group RRSP, so they also benefit from lower fees. Opening a spousal RRSP allows your partner to benefit from your Group RRSP. Contact our Client Relations team at 1-866-625-4777 to find out more about Group RRSPs. Contribute over and above the amount your employer matches each month. These additional contributions are a great way to meet your retirement objectives. If you have any unused RRSP contribution room, you can contribute over and above the RRSP annual contribution amount until you reach your limit. Taking these steps will help you retire earlier and more comfortably.

What is the 2021 RRSP contribution limit?

The total amount you can contribute to your RRSP each year is made up of your contribution limit for the current year which is determined by the CRA plus any “unused” contribution room from previous years. Your RRSP contribution limit for 2021 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $27,830. Your contribution and your employer’s contribution to your Group RRSP count towards your contribution limit, i.e., If John and his employer each contributed 5% of his income towards his Group RRSP. John will have used 10% of his RRSP contribution limit as part of his Group RRSP contribution, leaving 8% of John’s contribution limit available for his personal RRSP contribution or any additional voluntary contribution to his Group RRSP. Starting on January 1st, you have 60 days to contribute to the previous tax year. The deadline to allocate your Group RRSP contribution to the 2021 tax year is March 1st, 2022.

Can you contribute above the 2021 RRSP contribution limit?

If you don’t make the maximum allowable RRSP contribution in any given year, the Canada Revenue Agency (CRA) lets you carry forward the unused contribution room indefinitely and adds this to the amount you can contribute to for future years. You can find both your annual contribution limit and any carry-forward contribution room on your notice of assessment.

Conclusion

A Group RRSP is one of the best wealth creation tools for Canadians. It provides tax sheltered growth and allows you to take advantage of tax deferral during your high-income earning years and defer it until your retirement years when your taxable income has a lower tax rate. A company matching program is essentially your company offering you free money as a reward for taking positive steps towards saving for your retirement. A Group RRSP offers lower fees than your typical retail investments. There are multiple ways to take advantage of these lower fees, such as setting up a Spousal Group RRSP, contributing over and above your company match percentage and consolidating your immediate family’s RRSP under your Group RRSP plan. You can also consider making a lump-sum contribution and rolling over the bonus in your Group RRSP.

A worry-free retirement starts today. Contact our Client Relations team by calling 1-866-625-4777 to learn more about Group RRSP’s.