Group RRSP Advantage
Those employees fortunate enough to participate in an employer group RRSP plan are even further ahead than those who provide for their future retirement needs by contributions to an individual RSP.
Group RRSP Basics
In a group RRSP, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee's individual account and invested as specified.
Instant Tax Savings
The big difference with a group plan is that the contributor realizes the tax savings immediately, instead of having to wait until the end of the tax year. With an individual RRSP contribution, the tax break comes as a refund after taxes are filed the following year. This means of course, the government gets to enjoy an interest free loan of the contributor's money. On the other hand, Group RRSP contributions are made on a pre-tax basis, so the amount of tax withheld by the employer is calculated after the group RRSP contribution is deducted from taxable income. Result - an instant tax saving to the employee. With a group RRSP, 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.
A Group RRSP cuts taxes instantly at source and provides the difference as extra take-home pay to be spent or saved as the employee pleases.
The Difference With a Group Plan
No Group RRSP |
Group RRSP |
|
| Monthly Salary | $5,000 |
$5,000 |
| GRRSP Contribution | $0 |
$500 |
| Taxable Amount | $5,000 |
$4,500 |
| Tax Deducted At Source | $-1,275 |
$-1,125 |
| Take Home Pay | $3,750 |
$3,375 |
The above table compares an employee who contributes to a Group RRSP to one who does not.
For every $500 monthly contribution to a Group RRSP, take home pay is reduced by only $375 because the tax deducted at source is $125 less.
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 $125 difference, when multiplied by 12, equals the tax refund normally received in the following year - assuming the employee saves $6,000 ($500x12) 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.
