Group RRSPs: The Extra Edge
Amoung the many Canadians who have displayed the foresight to contribute to an RRSP, there is a growing segment of even more fortunate individuals: those who are enjoying several additional valuable benefits because they have chosen to participate in a Group RRSP through their employer.
Group RRSP Basics
A Group RRSP is simply a collection of individual RRSPs where the employer arranges for employees to make contributions through regular payroll deductions on a pre-tax basis. Upon completing the application form and deciding how much you want to contribute, your employer deducts that amount from your pay in a pre-tax dollars as permitted by Revenue Canada and forwards it to the financial organization selected by your employer as the investment manager and adminisdtrator for the group plan. Your contribution is then deposited into your individual RRSP and invested as you specify.
Instant Tax Savings
No matter how satisfying it may be to get a tax refund from Revenue Canada, getting one means you gave the government an interest-free loan. With a Group RRSP, contributions are made on a pre-tax basis by payroll deduction, so the amount of tax your employer is required to deduct at source is calculated after your Group RRSP contribution is deducted, resulting in an instant tax saving. In other words, you will not overpay your taxes during the year and then have to wait until your income tax return is processed to receive a refund.
So why over-pay your taxes and then wait for a refund from the government? A Group RRSP will cut your taxes instantly at source and give you that money as extra take-home pay to spend or save as you see fit.
| No Group RRSP | Group RRSP | |
|---|---|---|
| Monthly Salary | $2,500 | $2,500 |
| GRRSP Contribution | $0 | $300 |
| Taxable Amount | $2,500 | $2,200 |
| Tax Deducted at Source | -$443 | -$369 |
| Take Home Pay | $2,057 | $1,831 |
The above table compares an employee who contributes to a Group RRSP to one who does not.
For every $300 monthly contribution to a Group RRSP, take home pay is reduced by only $226 because the tax deducted at source is $74 less ($443-$369)
In effect, each dollar invested in a Group RRSP will cost this employee only 75 cents (cost will vary according to your salary, amount of contribution, province and personal situation).
The $74 difference, when multiplied by 12, equals the tax refund normally received in the following year - assuming the employee saves $3,600 ($300x12) in after tax dollars during the year and deposits it in a single lump sum into a regular RRSP at the end of the year.
Additional Group Benefits
In addition to the instant tax savings, a Group RRSP also offers the following benefits of contributing by installment:
- Payroll deduction offers the ultimate convenience; It is the easiest way to save.
- Avoid the last-minute RRSP rush at the end of February.
- It's easier to reach your RRSP limit that with a single lump-sum contribution at the end of February.
- Contributing earlier maximizes the value of your savings by keeping them tax-sheltered longer than year-end lump-sum contributions.
- It eliminates the need to borrow money from a bank to make an RRSP contribution, thus saving interest costs.