Free Money! Maximize Employer RRSP Contributions
By Kerry Knapp
Monster Contributing Writer
Group RRSPs are popping up everywhere these days, thanks in large part to their administrative simplicity. They’re a great way for employees to provide for their own retirement needs. What’s more, they offer a number of advantages over personal RRSPs:
1. Low-cost mutual funds: Because you’re part of a group, fund management fees are usually much lower than what you would pay on your own.
2. Competitive investment options: Group RRSPs offer a broader range of investment options than you could get yourself, including some usually available only to A-list investors.
3. Immediate tax savings: Assuming a 40% tax bracket, a $100 contribution makes only a $60 difference on your net pay because you get your tax break as soon as it comes off your paycheque. No more waiting for your tax refund!
4. Regular, automatic contributions: Payroll deductions make contributing regularly easy. In addition, you avoid many of the emotional pitfalls involved in investing and benefit from dollar-cost averaging.
5. Lower minimum contribution limit: Most group plans let you make lower regular contributions than if you were on your own. Some go as low as $25 per fund per pay.
6. Financial advice: The financial advisor assigned to your company’s group RRSP is normally available to discuss your plan and any other personal financial planning needs.
However, the single biggest advantage by far is the fact that many employers match employee contributions, typically contributing anywhere from 25% to 150% of what employees put into the plan.
That means if you contribute $1,000 to your RRSP, your employer would chip in an additional amount ranging from $250 to $1,500! That extra money goes directly into your own account, at no charge to you!
So why aren’t employees taking advantage of them?
According to a survey conducted by Sun Life Financial in January 2008, Canadians don't take full advantage of group RRSPS. Although 84% of the firm’s employer clients offer a group RRSP, less than half of all eligible employees participated. In other words, they’re passing up on free employer contributions worth thousands of dollars!
But how come? According to the survey, here are the top three reasons Canadian employees gave for not taking part in matched plans:
1) Twenty-one percent of respondents did not have the desire to do so.
This one deserves a good rethink: not wanting to contribute to a group RRSP when your employer is making matching contributions is tantamount to passing up on free money! No one wants to do that!
2) Fourteen percent did not have the money to spare.
Understandably, workers without extra cash may be reticent to take part. Remember, though, that your contributions generate a tax deferral that can save you big bucks! Also, it’s crucial to prepare for your retirement, so review your budget and see if you can make the numbers work.
3) Six percent preferred to invest on their own.
Are you an expert investor? Even if you can beat your group RRSP’s rate of return, it’s nearly impossible to come out ahead if your employer is making matching contributions. In some plans, employers match employee contributions dollar for dollar. Where else can you get a 100% return on your investment right off the bat?
Ultimately, the situation is pretty straightforward. If you have a group RRSP and want to cash in on as many of those employee dollars as possible, here’s how:
• Take part!
• Contribute your maximum, or as much as you can!
Your RRSP will thank you!