Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
A Group Registered Retirement Savings Plan (GRSP) is similar to an individual RRSP, but set up by an employer for their employees as a workplace benefit. Employers offer the plan because their own contributions are tax-deductible, and the plan acts as an incentive for new hires. Unlike a true pension fund, your employer doesn’t administer the plan, but outsources it to an insurance company or brokerage. Employees can put money in a range of preselected investments and an employer will often “top-up” contributions. If the employee approves of the investments on offer, it’s an effortless way to accumulate wealth for the long-term. If you leave your job and aren’t ready to retire yet, you can simply transfer the money to an individual RRSP.
How does a Group RRSP work
A GRSP works almost identically to an individual RRSP. (In fact, you’re free to have both, as long as you don’t exceed the annual maximum contribution limit).
The main differences is that you’re able to enjoy the tax savings on contributions immediately, (yay!), may get extra money from your job without having to actually work for it (yay!) and are restricted in the investment options available (boo!).
All the standard RRSP rules apply. You can contribute up to 18% of your previous year’s income to a maximum of $27,830 and your employer may choose to match a certain percentage. Employer deposits are considered part of your salary so you’ll have to pay tax on them, but once the money is in your GRSP, it’s tax-sheltered like the rest of your funds.
You can borrow money from yourself for the Home Buyer’s Plan and the Lifelong Learning Plan, but are otherwise expected to leave the money in until retirement. If you choose to withdraw early, the CRA will withhold up to 30% of tax payable immediately, and then charge you the rest in April. You also permanently lose the contribution room—unlike the TFSA your contribution room does not restart at the beginning of next year.
Once you retire or turn 71, you must convert your GRSP into RRIF, another type of tax-shelter, and pay yourself an annual, scheduled amount based on the value of the account and your age. You can also take out lump-sum or buy an annuity. At this point you’ll pay tax at your marginal rate.
Advantages of Group RRSPs
You get to offload the responsibility of paying tax on your contributions to your future self. In the meantime your money is allowed to bloom like a tropical flower, protected from any animals that are trying to chomp off its petals.
You get to delay paying tax on your contributions, which means you’ll have a higher cash-flow now.
Then you get to invest your contributions without paying any interest, dividend or capital gains tax, which otherwise would eat up a notable chunk of your returns. The CRA charges up to 53.5% on interest, 39.34% on eligible dividends and 26.76% on capital gains.
And finally, when you’re ready to retire, you can remove as much as you need to live on, and pay tax just on that amount.
Regardless, you can get the tax-deferral advantage in any kind of RRSP account. But here’s what makes the GRSP special:
Contributions made easy
The contribution amount of your choice is deducted from your paycheque at the source, before it ever hits your bank account. Not only do you immediately save on tax, giving you more money to spend, but you get to avoid the decision fatigue of deliberating every month if you should save for retirement or hit up that Nordstrom’s sale. The battle’s already been won, in the most painless way possible.
In addition, once that money is in your account it gets added directly to your portfolio into a mutual fund or index fund. While mutual funds certainly have their downsides, chief among them high management fees, they’re also convenient. No reading annual statements, no timing trades, no quarterly asset rebalancing. Someone else is doing all the work. If your workplace happens to have a GRSP with a more modern brokerage, like a robo-investing firm, you’ll truly get to enjoy all the perks of an automated portfolio, with far lower fees thank to passive management.
Note: Die-hard DIYers may consider this a limitation.
The benefit of GRSPs over an individual RRSP comes down to the free money you’re getting from your employer. Employers may match your salary up to 5%. Your nest egg will prosper a lot faster when two sources are contributing. Would you turn down a raise that your employer offered? Because when you decline to participate in a GRSP that’s basically what you’re doing. A solid life tip is to never turn down free legal money.
Limitations of Group RRSPs
GRSPS are often managed by large financial institutions that provide a short list of investments to choose from. Often, those investments are index funds that charge a higher fee compared with what you could get outside the plan, mutual funds whose management fees are discounted inside the plan but are still high relative to return, or GICs with so-so interest rates.
Either way, you won’t be able to structure your own portfolio or buy individual stocks. You always have the option, however, of contributing enough to max out your employer contributions, and then opening an individual RRSP and doing your own thing there.
How to Open a Group RRSP
Speak to an HR representative or benefits advisor at your workplace to see your options for opening a GRSP. The process is similar to opening an investment account.
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