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Often, choosing to enroll in RRSP matching is optional. That said, there are many different things to consider when RRSP matching. How do you want the RRSP invested? What will your contribution be? Is it a taxable benefit? Before we get too far into that, though, let’s take a look at what RRSP matching is and how it works.
How RRSP Matching Works
An RRSP, also known as a Registered Retirement Savings Plan, is a way to save money for retirement or additional income for retirement, while deferring the taxes on that portion of your income. An RRSP matching program is when the company will match your contributions into an RRSP. This is similar to a pension plan. However, you have more control over an RRSP than your company pension plan.
When you opt into an RRSP matching program, you’re then putting money into a group RRSP, not a personal RRSP. You’ll fill out the paperwork with the Human Resources department (HR department) and decide how much you’re going to contribute. While what your employee will match will be capped, most of the time, you can choose to put as much in the account as you like.
Just because you have a group RRSP doesn’t mean you can’t have a personal RRSP, either. However, you need to consider the fact that your contributions to both RRSPs will affect your contribution limit, also known as contribution room. That also means that all contributions will be tax deductible at tax time as long as you claim your RRSP contribution receipts for your RRSP accounts. However, there are tax implications for overcontributing,
Employer Contributions of RRSP Matching
With RRSP matching, you may be wondering how this process affects the employer and why they would choose this option over a traditional pension program or a deferred profit-sharing plan. There are plenty of reasons, but here’s a look at a few ways employer contributions are affected.
Are They Taxable?
Contributions made to a group RRSP that are the employer’s contributions are considered to be earned income. However, they aren’t taxable. They are then deducted as part of the employee's RRSP contributions deduction. The employer counts the employer’s contributions as income and not part of a pension program.
RRSP Matching and Taxable Benefits
The great thing about an RRSP matching program is that the tax process for employee contributions is similar to that of a personal RRSP. The RRSP account is a registered account with the CRA under the employee's name. Any contributions made to that account are then considered tax deductible and considered part of your annual contribution room.
With an RRSP, it isn’t mandatory to claim your contributions. However, the idea of an RRSP is to defer your taxes until retirement so that it can be considered taxable income. Due to the fact you’re likely to be earning less in retirement and have a lower tax bracket, the tax you pay on that income is going to be less.
What you claim from your RRSP can be put towards an amount you owe to the Canada Revenue Agency or be gotten back as a credit. Many choose to take those funds and then invest them into their RRSP.
The Average RRSP Matching in Canada
In Canada, the average that companies offer for RRSP matching is between 50%-100% of the employee's contributions. However, the average employers' portion is 4%-10% of your income. In most cases, with a company’s group RRSP, you can contribute over and above what the company will match.
Companies That Offer RRSP Matching
In Canada, there are many different companies that offer RRSP matching. Many newer companies are choosing this option because it’s simpler than your traditional pension plan, and it helps their employees save for retirement. All they need to do is find an insurance company or investment company to handle the RRSP matching program. Here are a bunch of companies in Canada where the employer offers RRSP matching:
- Manulife
- HUB International
- Sun Life
- BC Assessment
- BC Hydro
- Canada Revenue Agency
- Parks Canada
- Natural Resources Canada
- Black Press
- RCMP
- Transport Canada
- Veteran Affairs Canada
- Fisheries and Oceans Canada
These are just a few. However, there are thousands of different companies in Canada that actually offer RRSP matching.
Maximum RRSP Matching
When it comes to RRSP matching, there’s a maximum that your employer will match to be added to your RRSP. That said, there’s also a maximum amount you can add to RRSPs each year.
When it comes to the maximum an employer will match, well, that’s individual to each employer. Some will match up to $25 each pay period, while others will allow for much more. However, you do need to pay attention to how much is being contributed annually between all of your RRSPs.
The maximum amount you can contribute each year is 18% of your previous year's income, up to a maximum of $31,560. However, previous years' unused contributions can be rolled over.
Employer RRSP Matching Percentage
When your employer matches contributions, the amount that they decide on is based on a percentage of your income. This will differ for every employer. However, your contributions usually aren’t limited. You can contribute up to however much you like; they’ll only match up to a certain percentage. A good percentage is anywhere between 2.5% and 5%.
How Group RRSPs are Invested
While your employer does add contributions to your account every month, they also set up the account with whoever the account manager is. That said, you get to pick your own group RRSP investment options most of the time. Most group RRSP providers will give you a survey that helps to indicate what type of risk you’re comfortable with for your group plan and take it from there.
Example of RRSP Matching
With RRSP matching, plenty of scenarios could occur. However, here’s a pretty simple example.
Say your income is $75,000 per year, and you decided to add 5% of your income to your Group RRSP. This gives you a total amount of $3,750 that you contributed that year. If your employer matches 5%, then they will also contribute $3,750. This means your total group RRSP contributions were $7,500, a total of 10% of your annual income.
As we mentioned before, 5% is the high end of RRSP matching amounts. Not all group RRSPs will off these amounts. You also need to remember that this isn’t free money; it’s part of the income that you earned. It’s not extra money, either.
Group RRSPs and Leaving Your Job
One thing you need to consider about a group RRSP is what happens to it when you quit or leave your job before retirement. In this case, you don’t need to stress. You won’t lose the account, and you will have a few different options for what to do with it.
Once you are no longer employed by the company that contributed to the Group RRSP, then you essentially have two options. You can choose to cash out the RRSP or transfer it to a personal RRSP.
If you choose to cash out the RRSP, then you will be charged a withholding tax. This is because you didn’t pay taxes on any of the funds that you contributed to this account. If you transfer the RRSP, however, you can keep the same amount that’s already in it and continue contributing.
Taking Out Group RRSP Benefits While Still Employed
With a traditional personal RRSP, you can take up to the full amount at any time as long as you pay the withholding tax. That said, you can’t always do that with Group RRSP benefits. Many employers will have restrictions in place where you can cash out a small amount, but if you want to take out large amounts, you do need your employer's permission to do so. That said, there usually isn’t a vesting period.
Are Group RRSPs Worth It?
Whether or not a Group RRSP is going to be a good idea for you is based on your personal finance situation, your age, and your retirement situation. It’s easily transferable; you get to choose the certain amount you want to add to it every month, and it comes directly from your paycheck.
From an employer perspective, more and more businesses are choosing to use RRSP matching programs. This is because it’s a much simpler process than a pension and it’s not subjected to pension legislation. If a business runs into trouble, then a RRSP matching program is much easier to deal with. Many employers who wouldn’t have been able to offer retirement benefits before can do so now with RRSP matching options.
Final Thoughts
Just like individual RRSPs, there are many things to consider when getting a Group RRSP. That said, most of the time, it’s a good idea. It’s a good way to create retirement income while getting help from your employer. Plus, the money comes out of your paycheck before you even have a chance to spend it. Even if you only contribute a small amount every month, it can add up relatively quickly.
