Group RRSP

Those employees fortunate enough to participate in an employer group RRSP plan are 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 primary 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 - instant tax savings 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 reduces taxes at source and therefore 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 $150 less.

With a Group RRSP plan, each dollar invested will cost this employee only 75 cents (cost will vary based on your salary, amount of contribution, province and personal situation). The $150 difference, when multiplied by 12, equals the tax refund normally received in the following year - assuming that the employee sets aside $6,000 ($500x12) in after tax dollars during the year and makes a single lump deposit into a regular RRSP at the end of the year.

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