WHAT ARE THE ADVANTAGES OF A GROUP RRSP?
What Are The Advantages Of A Group RRSP?
Group Registered Retirement Savings Plans (Group RRSPs) have grown in popularity over the past decade for a few reasons. One is that there is an increasing number of people taking their retirement earlier than ever before. These people are finding it easier to make group plans.
Another reason would be the rigidity of defined retirement plans. These plans are associated with high administration costs and demands, more rigid legislation and potential for liabilities in the future. Group RRSPs are becoming more viable vehicles for retirement savings and investment as people eye Group RRSP advantages.
What Is A Group RRSP?
This is just like the normal individual RRSP, only that it is offered through the employer. The employer adds some advantages in the package with features that include tax-deductible contributions and tax-deferred growth plans.
How Does A Group RRSP Benefit The Employee?
- Immediate tax deduction – There is a fundamental difference in how individual and group RRSP contributions are done. Group RRSPs are done at the source with no tax on them.
- Employer matching – Group RRSPs can obtain higher matching from employers than typical RRSPs. This is in the range of 2-5%. This is like free money because it is eventually going to the employee’s investment portfolio.
- Flexible – Typical pension plans are rigid, more so when an employee leaves one workplace for another. Redeeming and transferring this kind of plan is usually difficult and sometimes comes out to the employee’s loss.
In the Group RRSP, there is higher flexibility in what the employee can do with it. There are possibilities in redeeming or transferring it. However, employer lock-in restrictions sometimes apply for the employer’s part of the contribution.
- Spousal contributions – Unlike typical RRSPs that allow for only the employee’s contributions, Group RRSPs allow for spousal contributions. This gives an advantage to a higher investment return.
- Disciplined investing – A Group RRSP ‘forces’ the employee to make investment contributions. This is a disciplined approach that avoids the risks of impulsive and casual investment where money can be lost.
- Lower contributions – Group RRSPs allow lower contributions than typical RRSPs. Contributions can be as low as $25 per fund, per pay.
- Pay yourself first – Contributions to an RRSP are akin to the employee paying himself/herself first because the money is going into their own investments.
There are advantages for the employer too in lower administration costs. This is because much of the Group RRSP’s management is done by the provider. The biggest Group RRSP advantage for the employer is that they are not obliged to pay a fixed amount to an employee upon the employee’s retirement.