Everyone wants to save money; and when you can save with some help along the way, that’s even better. If you work at a company that offers a group saving plan, it’s important to be aware of all the details so you understand how to best use the plan to your advantage.
One of the most common group financial plans is the group RSP. A group RSP is very similar to an individual RSP except it is administered on a group basis by the employer.
As an employee, you make contributions to the group RSP directly from your paycheque and immediately receive the tax benefit from the RSP contribution, as it’s applied to each paycheque instead of at the end of the year.
You can define how much you want to contribute to the group plan either as a fixed dollar amount (i.e. $100 per pay cheque) or as a percentage of income.
Employers have the option of matching your contributions in some manner either on a percentage of your pay or up to a predetermined amount. While employer matching makes for a better plan, it is not required.
The contribution and tax rules for group RSPs are guided under the income tax act. You are allowed to contribute to a maximum of 18% of your previous year’s income and whatever your unused contributions from previous years’ income may be. This includes both contributions to group and individual RSPs and pensions. When your RSP is withdrawn, the amount is taxable to you in the year of the withdrawal.
When you make a contribution through your payroll, you are contributing with “before tax” dollars and you receive the tax benefit immediately. Employer contributions are tax deductible and are a taxable benefit to you.
Every company is different and there are many options available when creating a group RSP, each coming with various choices and outcomes. For instance:
- A waiting period can be established so that only employees that have been with a company for a certain period of time are eligible to participate.
- The plan can be structured to reward employees differently based on their time with the company. For example the matching contribution can be increased the longer an employee stays with the company.
- The percentage matching contribution and maximums can vary for different employee levels depending on the objectives of the employer.
- If a company runs into hard times the employer matching can be stopped or changed at any time.
An important thing to remember is, once the employer makes a contribution into the employee’s plan, those funds are owned and controlled by the employee. You have the right to withdraw the funds, pay the tax and use the money for whatever purpose.
If you leave your employer, it is important to know that your group RSP money is not locked in. When you leave, your group RSP money can be:
• transferred to your own individual RSP or RIF
• used to buy an annuity or
• taken in cash and be taxed as income in the year you receive it.
Always remember, there may be restrictions on withdrawals from your group RSP while you are employed by that company. Make sure you understand the rules of the plan before you invest.
Another way for an employer to reward employees is to offer a deferred profit sharing plan (DPSP). DPSPs are a way for employers to reward and thank employees for their hard work that has contributed to the profits of the company. A DPSP is flexible in terms of how much an employer has to contribute. For example:
- Any amount out of profits may be contributed to a DPSP. If profits fall, DPSP contributions can be reduced or suspended. It is entirely up to the employer.
- A vesting period can be implemented so that in order for an employee to leave the company and take their accumulated DPSP value with them, they would have to have been with the company for 2 years, as an example.
There are maximum amounts that can be contributed to a DPSP by an employer, similar to RSPs. An employee’s future RSP room will be reduced by what is called a Pension Adjustment (PA). Employee contributions cannot be made to a DPSP. Only employers can contribute. DPSPs are often used in tandem with a group RSP.
In summarizing, there are four things to know about these types of group pension plans.
- A group RSP is designed to encourage you to save at work by contributions through payroll deductions.
- Both you and your employer may contribute depending on the rules of the plan.
- All contributions, both yours and your employer, are tax deductible to you, and all investment earnings are tax deferred.
- Like an individual RSP, you decide how your money is invested. Your employer will provide a range of investment options to choose from. You will likely have fewer investment choices that you would with an individual RSP but the important thing to remember is that you are saving.
Talk to your ACU wealth advisor for more information on the many options available with group savings plans offered by your employer.