Group Registered Retirement Savings Plans (RRSPs)
A Group RRSP is a collection of individual RRSPs, into which employees
and/or their employer make contributions through regular payroll deductions
on a pre-tax basis.
Most retirement plans are designed to shelter taxes on any gains made
until retirement, at which point employees usually enter a lower marginal
tax bracket. The Canadian government also offers incentives to contribute
to a registered retirement plan by lowering the employee's taxable income
in the year that contributions are made. In essence, Canadians are encouraged
to save for their retirement with RRSPs.
Two basic rules for RRSP investing
- You can invest up to 18% of your earned income each year to a fixed
maximum ($13,500 in 2001 and 2002). Employer contributions will reduce
this contribution room.
- The percentage of foreign investments in your RRSP cannot exceed 30%
of the total contributions in your plan.
Group RRSPs: Employee benefits
Investment flexibility. RRSPs can be very
comprehensive and can include virtually any qualified investments that suit
your needs: cash, mutual funds, stocks, small-business ventures, labour-sponsored
funds, segregated funds, guaranteed investment certificates (GICs), bonds
(including Canada Savings Bonds), foreign investments, etc. Consider the
options carefully with your financial advisor.
Income splitting for couples. Contributions can often be made by
a higher-earning spouse to the plan of a lower-earning spouse, as long as
the contributor is an employee of the company. This option allows for withdrawals
at retirement at the lower-earning spouse's tax rate.
Instant tax reductions. With a Group RRSP, contributions are made
direct from your payroll, before you are taxed. The amount of tax your employer
is required to deduct is therefore reduced. Although it's nice to get a
tax refund from the Canadian government, it means you've lent the government
money - interest free - over the year. Consider the following:
| |
|
|
|
No Group
RRSP |
With Group
RRSP |
| Monthly salary |
$2,500 |
$2,500 |
| Group RRSP contribution |
$0 |
$300 |
| Taxable amount |
$2,500 |
$2,200 |
| Tax deducted at source |
($443) |
($369) |
| Take-home pay |
$2,057 |
$1,831 |
| |
| Cost of $300 RRSP contribution |
$300 |
$226 |
| Instant monthly tax savings |
$0 |
$74 |
| Interest free loan to government |
$888 |
$0 |
(The above is for illustration purposes only. Individual situations may
vary).
In effect, each dollar contributed to the Group RRSP costs just 75 cents.
Note that employer contributions made on your behalf are considered
a taxable benefit to you. |
