Lots to know about Group RRSPs
One of the most common group financial plans is the Group RRSP. A group RRSP is very similar to an individual RRSP you would open at a financial institution except that is administered on a group basis by the employer.
Employees make contributions to the group RRSP directly from their paycheque and the tax savings from the RRSP contribution can be applied to each paycheque immediately instead of at the end of the year.
Employees can define how much they want to contribute to the group plan either as a fixed dollar amount (ie $100 per paycheque) or as a percentage of income.
Employers have the option of matching employee contributions in some manner and although matching does make for a better plan, it is not required.
The contribution and tax rules for group RRSPs are guided under the income tax act. The most anyone can contribute to a RRSP is 18% of his or her previous years income. This includes both contributions to Group RRSP, individual RRSPs and even pensions.
When money is put into the RRSP, the employee receives an eligible tax deduction for the amount contributed. Any employer contributions are tax deductible but also can be seen as a taxable benefit.
When the money is withdrawn from the RRSP, the amount withdrawn is taxable to the employee in the year of withdrawal. Proper use of RRSPs requires good evaluation of tax rates when the money goes into the RRSP and also when the money comes out of the RRSP (see article on Proper Use of RRSPs).
Generally speaking the investment options limited by what the financial institution administering the Group RRSP has to offer. Typically, group RRSP plans are administered by a bank, mutual fund company or an insurance company. Part of implementing a good Group RRSP plan is to have a good solid foundation of choice for the employers.
Some Group RRSP plans offer self-directed RRSP options which gives employee a broader range of investment choices beyond just what the bank, mutual fund company or insurance company has to offer.
One of the biggest but often overlooked benefits of a group RRSP is the fees tend to be much lower because of the buying power of a group of people. The more money in the plan, the lower the fees become. This is important because fees do matter and lower fees can translate to better returns for the employee over time.
Group RRSPs are one of the easiest group financial benefits to administer. They are simpler and less regulated. It is easy to add employees. It is also easy to wind down the plan or deal with terminating employees. They simply move the money to an individual RRSP plan. Pensions rules are usually more complicated and more cumbersome.
It is much more difficult to vest employer funds in a group RRSP. Once the employer makes a contribution into the employees plan, those funds are then owned and controlled by the employee. Technically, the employee has the right to withdraw the funds, pay the tax and use the money for whatever purpose they want. There are ways to design the plan to minimize the temptation to withdraw the funds.