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Retirement savings

December 30, 2013

Group RRSPs: Strength in numbers

A group RRSP can force you to save for retirement, provide a welcome tax break and cost less than a non-group plan.

You know you should do it, but saving for retirement isn’t always at the top of your to-do list. It’s easy to delete those emails from HR reminding you to sign up with your employer’s group RRSP, and to forget that building retirement savings can help fund a comfortable retirement. But the earlier you start saving, the bigger the benefits you’ll enjoy over the long term.  If your employer offers one, a group registered retirement savings plan can be a logical place to start the retirement savings process, since it can be less costly to manage your investments in a group plan than in a retail setting. Plus, you’ll get a tax break and feel like you’re actually doing something meaningful for your future retirement.

Starting is easy. A small contribution is usually all you need to begin investing. And if your plan allows it, you can make lump-sum contributions or transfer money from another financial institution at any time. If your employer offers automatic payroll deduction, consider signing up. It can take the monthly decision right out of your saving equation, and increase your likelihood of investing regularly.

Tax breaks

Contributions to your RRSP reduce the income tax you pay. And if you can contribute through payroll deductions, your contributions are invested before tax is deducted. This allows you to realize the savings on the spot. For example, assuming you are in a 40% tax bracket, a $25 contribution will cost you only $15 net because of the effect of the tax break when you make your contribution. Income tax on investment earnings in your group RRSP, like those in an individual RRSP, will be deferred until you withdraw them, which will presumably be after you retire and are in a lower tax bracket.

It can also cost less to manage your funds in a group RRSP. When you buy in bulk, you get a better deal. The same concept applies to a group RRSP. When a large group of plan members choose from the same list of funds, your company can negotiate competitive fund management fees. Note that if you’re offered a choice among several investment options, it’s up to you to make your own investment decisions. Some employers offer tools that you may find helpful. It’s also important to remember that you are responsible for staying under your contribution limit. Your plan administrator isn’t required to tell you if you’re getting close.

Other benefits

If you have more than one RRSP and don’t want to manage multiple accounts, consider consolidating. Many plans allow you to move over other registered savings (locked-in or non-locked-in) into your group RRSP at any time. This can help you manage all of your investments in one place and keep your management fees low.

If you’re married or in a common-law relationship, check to see if your employer offers a spousal RRSP option, and consider contributing on behalf of your spouse. The biggest advantage here is that it enables you to split retirement income between the two of you, potentially reducing the amount of tax you pay in total. Plus, you still get a tax break from your contribution.

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