Often, choosing to enroll in RRSP matching is optional. That said, there are many different things to consider when RRSP matching. How do you want the RRSP invested? What will your contribution be? Is it a taxable benefit? Before we get too far into that, though, let’s take a look at what RRSP matching is and how it works.
How RRSP Matching Works
An RRSP, also known as a Registered Retirement Savings Plan, is a way to save money for retirement or additional income for retirement, while deferring the taxes on that portion of your income. An RRSP matching program is when the company will match your contributions into an RRSP. This is similar to a pension plan. However, you have more control over an RRSP than your company pension plan. Having the option of a group RRSP encourages employees to save their money for the future at a fixed dollar amount with lower fees.
When you opt into an RRSP matching program, you’re then putting money into a group RRSP, not a personal RRSP. You’ll fill out the paperwork with the Human Resources department (HR department) and decide how much you’re going to contribute. While what your employee will match will be capped, most of the time, you can choose to put as much in the account as you like.
Just because you have a group RRSP doesn’t mean you can’t have a personal RRSP, either. However, you need to consider the fact that your contributions to both RRSPs will affect your contribution limit, also known as your contribution room. That also means that all contributions will be tax-deductible at tax time as long as you claim your RRSP contribution receipts for your RRSP accounts. However, there are tax implications for overcontributing,
Employer Contributions of RRSP Matching
With RRSP matching, you may be wondering how this process affects the employer and why they would choose this option over a traditional pension program or a deferred profit-sharing plan. There are plenty of reasons, but here’s a look at a few ways employer contributions are affected.
Are They Taxable?
Contributions made to a group RRSP that are the employer’s contributions are considered to be earned income. However, they aren’t taxable. They are then deducted as part of the employee’s RRSP contributions deduction. The employer counts the employer’s contributions as income and not part of a pension program.
RRSP Matching and Taxable Benefits
The great thing about an RRSP matching program is that the tax process for employee contributions is similar to that of a personal RRSP. The RRSP account is a registered account with the CRA under the employee’s name. Any contributions made to that account are then considered tax-deductible and considered part of your annual contribution room.
With an RRSP, it isn’t mandatory to claim your contributions. However, the idea of an RRSP is to defer your taxes until retirement so that it can be considered taxable income. Due to the fact that you’re likely to be earning less in retirement and have a lower tax bracket, the tax you pay on that income is going to be less. What you claim from your RRSP can be put towards an amount you owe to the Canada Revenue Agency or be gotten back as a credit. Many choose to take those funds and then invest them in their RRSP.
The Average RRSP Matching in Canada
In Canada, the average that companies offer for RRSP matching is between 50%-100% of the employee’s contributions. However, the average employer’s portion is 4%-10% of your income. In most cases, with a company’s group RRSP, you can contribute over and above what the company will match. These amounts are normally the same for current employees as well as potential employees; the same rules apply. However, they can have many different plan tiers.
Companies That Offer RRSP Matching
In Canada, there are many different companies that offer RRSP matching. Many newer companies are choosing this option because it’s simpler than a traditional pension plan, and it helps their employees save for retirement. All they need to do is find an insurance company or investment company to handle the RRSP matching program. Here are a bunch of companies in Canada where the employer offers RRSP matching:
- Manulife
- HUB International
- Sun Life
- BC Assessment
- BC Hydro
- Canada Revenue Agency
- Parks Canada
- Natural Resources Canada
- Black Press
- RCMP
- Transport Canada
- Veteran Affairs Canada
- Fisheries and Oceans Canada
These are just a few. However, there are thousands of different companies in Canada that actually offer RRSP matching.
Maximum RRSP Matching
When it comes to RRSP matching, there’s a maximum that your employer will match to be added to your RRSP. That said, there’s also a maximum amount you can add to RRSPs each year.
When it comes to the maximum an employer will match, well, that’s individual to each employer. Some will match up to $25 each pay period, while others will allow for much more. However, you do need to pay attention to how much is being contributed annually between all of your RRSPs. The maximum amount you can contribute each year is 18% of your previous year’s income, up to a maximum of $31,560. However, previous years’ unused contributions can be rolled over.
Employer RRSP Matching Percentage
When your employer matches contributions, the amount that they decide on is based on a percentage of your income. This will differ for every employer. However, your contributions usually aren’t limited. You can contribute up to however much you like; they’ll only match up to a certain percentage. A good percentage is anywhere between 2.5% and 5%.
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How Group RRSPs are Invested
While your employer does add contributions to your account every month, they also set up the account with whoever the account manager is. That said, you get to pick your own group RRSP investment options most of the time. Most group RRSP providers will give you a survey that helps to indicate what type of risk you’re comfortable with for your group plan, and take it from there.
Example of RRSP Matching
With RRSP matching, plenty of scenarios could occur. However, here’s a pretty simple example.
Say your income is $75,000 per year, and you decided to add 5% of your income to your Group RRSP. This gives you a total amount of $3,750 that you contributed that year. If your employer matches 5%, then they will also contribute $3,750. This means your total group RRSP contributions were $7,500, a total of 10% of your annual income.
As we mentioned before, 5% is the high end of RRSP matching amounts. Not all group RRSPs will offer these amounts. You also need to remember that this isn’t free money; it’s part of the income that you earned. It’s not extra money, either.
Group RRSPs and Leaving Your Job
One thing you need to consider about a group RRSP is what happens to it when you quit or leave your job before retirement. In this case, you don’t need to stress. You won’t lose the account, and you will have a few different options for what to do with it.
Once you are no longer employed by the company that contributed to the Group RRSP, then you essentially have two options. You can choose to cash out the RRSP or transfer it to a personal RRSP.
If you choose to cash out the RRSP, then you will be charged a withholding tax. This is because you didn’t pay taxes on any of the funds that you contributed to this account. If you transfer the RRSP, however, you can keep the same amount that’s already in it and continue contributing.
Taking Out Group RRSP Benefits While Still Employed
With a traditional personal RRSP, you can take up to the full amount at any time as long as you pay the withholding tax. That said, you can’t always do that with Group RRSP benefits. Many employers will have restrictions in place where you can cash out a small amount, but if you want to take out large amounts, you do need your employer’s permission to do so. That said, there usually isn’t a vesting period.
Are Group RRSPs Worth It?
Whether or not a Group RRSP is going to be a good idea for you is based on your personal financial situation, your age, and your retirement situation. It’s easily transferable; you get to choose a certain amount you want to add to it every month, and it comes directly from your paycheck.
From an employer’s perspective, more and more businesses are choosing to use RRSP matching programs. This is because it’s a much simpler process than a pension, and it’s not subject to pension legislation. If a business runs into trouble, then a RRSP matching program is much easier to deal with. Many employers who wouldn’t have been able to offer retirement benefits before can do so now with RRSP matching options.
Can You Have a Group RRSP as well as an Individual RRSP?
If you’re looking at a position with a potential employer who offers a group RRSP matching program, you can have this RRSP while keeping your individual RRSP. With these RRSPs, put more money away and claim it on your income in your Registered Retirement Savings Accounts; however, you cannot exceed your limits for RRSP contributions.
Other Types of Employer Pension Plans
Group RRSPs are just one type of pension that employers offer. They allow for employer contributions as well as employee contributions, while still allowing you to add to a retirement account. These RRSP accounts can be used to reduce your taxable income when you claim them on your income tax return.
Besides Group Registered Retirement Savings Plans, also known as Employer-matched RSPs, other employers can offer traditional pension plans or deferred profit-sharing plans. Some employers also choose to offset some of the pension programs with employee education options instead.
Other Benefits That Employers Offer
When it comes to payroll deductions, there are other benefits employers can offer than just employer RRSP matching. Many employers also choose to offer existing employees a group plan through an insurance company. These include dental benefits, extended health benefits, and short-term/long-term disability insurance. Some also offer life insurance that is administered by the plan administrator.
With these benefits, the employee contributes as well as the employer. You’ll regularly contribute every paycheque and claim any pension amounts that are included on your tax return to get an accurate notice of assessment. They can help secure long-term financial security, which is a great incentive to offer potential hires.
Why Companies Offer RRSP Matching
When the human resources department of potential employers is looking for new employees, the more incentives they can offer, the better. Since many younger employees are looking to save for retirement age, they see the fact that the employer matches the employees’ RRSP contributions as free money. In fact, many employees don’t want to accept a position without some sort of retirement benefit.
With RRSP matching, employers can still invoke a vesting period without the same cost as a traditional pension plan. This is then used as a retention tool to entice employees to stay with the company longer. They’ll have to stay for the required period of time in order to receive the entire amount, giving employees less of an incentive to look for a new position.
Benefits of Having RRSPs
While all RRSP contributions reduce your annual RRSP contribution limit, you can still use an individual RRSP to maximize your contribution room, as long as you don’t go over. While everything you earn is considered taxable income, you can use RRSPs as a taxable benefit to reduce your tax liability. Here are some other ways that RRSPs can help you as well.
- You can carry forward any unused contribution room.
- You can use the Home Buyers Plan to use your earned income put into an RRSP as a down payment on your first home, without any penalty.
- You can use the Lifelong Learning Plan using the same funds you put into an RRSP towards your education, without any penalty.
- You can make additional contributions at any time as long as you don’t go over your annual contribution limit.
- You can set up automatic contributions using online banking.
Home Buyers Plan
With the Home Buyers Plan, you can withdraw up to $60,000 from your RRSPs for a purchase or a new-build if you’re a first-time home buyer. After two years, you then have to repay the funds into your RRSP, and you have 15 years to do so. There will be an amount that you’re required to pay back every year.
In order to qualify for this program, you must be a Canadian resident and have had funds in your RRSP for a minimum of 90 days. If you’re unable to pay the funds back into an RRSP, then you’ll be charged a penalty for removing funds from an RRSP early. This is known as a withholding tax and varies based on the amount you removed.
Lifelong Learning Plan
Another perk to having an RRSP is the Lifelong Learning Plan. If you’re looking to further your education, this plan allows you access to your own money without the traditional penalties for withdrawing from a registered account early. You can take up to $10,000 per year or a lifetime total of $20,000.
Once you’ve taken out the funds, you’ll have 10 years to put the money back into your RRSP. Each year, you have to replenish a minimum of 1/10th back. Anything you can’t replace within the 10 years will be subject to a withholding tax.
Final Thoughts
Just like individual RRSPs, there are many things to consider when getting a Group RRSP. That said, most of the time, it’s a good idea. It’s a good way to create retirement income while getting help from your employer. Plus, the money comes out of your paycheck before you even have a chance to spend it. Even if you only contribute a small amount every month, it can add up relatively quickly.
