You’re likely familiar with the Registered Retirement Savings Plan (RRSP), which gives Canadians a way to shelter income tax until retirement, but have you considered a Group Retirement Savings Plan (RSP) for your employees?
How does a Group RSP work?
A Group RSP is a group retirement savings plan managed and administered by the employer at a group level.
If an employee chooses to participate in the Group RSP, they can make contributions to their retirement savings through payroll deductions.
Employees can contribute up to 18 per cent of their previous year’s taxable income, up to a maximum of $26,500 for 2019.
They can still contribute to an individual RRSP, they’ll just need to keep track of how much they contribute to each plan so they don’t exceed their yearly limit.
Like an individual RRSP, the money in a Group RSP can be invested in stocks, exchange-traded funds (ETFs), guaranteed investment certificates (GICs), mutual funds and bonds.
Earlier this year, FBC announced its small business and farming Members would have access to a new Group RSP from Nest Wealth.
Nest Wealth is a safe and secure “robo-advisor” platform that manages portfolios for individuals. They're now offering a fully digital Group RSP plan for small businesses.
To keep fees low, Nest Wealth uses Exchange Traded Funds that simulate various investment instruments and indices.
What are exchange-traded funds?
An exchange-traded fund (ETF) is an investment fund that’s traded on a stock exchange, like a stock, but holds a basket of investments, like a mutual fund. They allow you to gain exposure to a variety of asset classes like bonds, equities, and real estate, and provide a low cost and efficient way to build a diversified investment portfolio.
The advantages of a Group RSP
Since money is taken directly from the employee’s paycheque, it provides automatic retirement savings. And because employees are contributing as a group, management fees tend to be lower than individual RRSPs.
The savings are not locked in and employees can withdraw funds at any time. They don’t have to pay income tax on their contributions unless they withdraw.
Your employees can transfer the contributions to an individual RRSP, registered retirement income fund (RRIF) or cash them in.
As a small business owner, having a Group RSP could be part of your benefits package that you leverage for employee recruitment and retention. You could also offer employer matching to the Group RSP as another incentive - companies usually offer between three to six per cent of the employee’s salary. Those contributions are tax deductible to the employer.
Nest Wealth at Work's digital offering is simple for employees to sign up for and use, so there's no administrative burden to you. As the employer, you can monitor the plan and manage program options like matching contributions.
The disadvantages of a Group RSP
Since it’s not locked-in, the downside is employees may withdraw money (and pay tax on it), depleting their retirement fund. If an employee likes control over their investments, they might not like that the investments are set by the provider.
And when an employer matches the Group RSP contribution, it’s a taxable benefit for the employee. They’ll need to deduct all contributions from the employer to get a tax refund.
The value of investing now
If you save $200 a month starting at the age of 25, you will have accumulated $306,500 by the age of 65 (5 per cent compounded).
If you delay investing, you’ll have to contribute more money each month to reach the same amount at 65:
- $269 at age 30
- $367 at age 35
- $513 at age 40
- $742 at age 45
- $1,142 at age 50
- $1,965 at age 55
Group RSPs offer an easy, affordable way for employees to start contributing to retirement as soon as possible. Get in touch with FBC today to find out how your business can benefit from our Membership model, which includes access to a Group RSP for small business.
Disclaimer: The material above is provided for educational and informational purposes only. Always consult a tax professional like FBC regarding your specific tax situation.