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Employee Benefits

Retirement Planning: Understanding RRSPs

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Financial literacy is an issue many adults struggle with. 85% of Canadians believe that there is a lack of financial literacy in the country, and that because of this, there’s been a drastic rise in consumer debt. Consumer debt leaves people financially strapped, which in turn makes it more difficult to save for retirement.

Globally, 85% of employees want help with their retirement plans—and 82% said they would like retirement coaching (with Millennials leading the charge at 84%).

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How does any of this relate to RRSPs? Well, a Registered Retirement Savings Plan (RRSP), is one-way businesses can help employees prepare and save for retirement.

Many companies offer staff the ability to opt-in to a group RRSP plan—usually matching upwards to 2% of what an employee contributes. While offering a group RRSP plan is a great way to help employees with their retirement funds, often businesses fail to explain what exactly an RRSP is, why it’s important and how it helps with future financial security.

RRSP—What it is and How Does It Work?

To begin, let’s break down what exactly an RRSP is. As the name suggests, an RRSP is a retirement savings plan.

First introduced in 1957 by the Canadian government, RRSPs are a “tax-advantaged” account—they specifically provide tax breaks to those who invest in them. In the case of an RRSP, the money you put into the account is exempt from CRA taxes for the year you deposit it. Your financial contributions won’t be taxed until you withdraw it. In doing this, your RRSP contributions cut down your tax bill for the current year as the contributions will be deducted from your income for the year.

When you finally withdraw your contributions from your RRSP the money will be taxed. However, as it’s expected you won’t make a withdrawal for several years, there’s a strong possibility your marginal tax rate—the tax rate you incur each year on your income—will be lower as you’ll most likely have entered retirement.

Key Takeaways

  • RRSPs are registered by the Canadian Government
  • RRSPs are overseen by the Canada Revenue Agency (CRA)
  • Your contributions reduce your tax bill (for the current year)
  • Your RRSP isn’t taxed until you withdraw the funds, years down the line

Are There Limits to What You Can Contribute?     

Good question.

The answer is yes, there are yearly limits to what you can contribute.

Assuming you have filed your income taxes and have earned income (two requirements for having an RRSP), you can currently contribute:

  • 18% of the income you earned in the previous year, or
  • The maximum contribution for the current tax year, for 2019, which is $26, 500

If you do go over your contribution limit you’ll be sent a notice from the CRA advising you nix the extra money, assuming it’s more than an additional $2000. Any additional contribution under $2000 can stay, but it will be taxed. If you go over $2000, you run the risk of a 1% penalty assessed monthly—for every month you’re over the limit.

What are the Benefits of an RRSP?

An RRSP is a great security for retirement. While you do receive payment from the government in the form of the Canadian Pension Plan, additional savings add cushion, providing you with more money to live off.

RRSP benefits also include:

  • Your savings grow tax free
  • You can convert your RRSP so that when you retire you receive regular payments—ensuring you don’t run through your savings too fast
  • You can borrow from your RRSP to help purchase your first home or to explore more education
  • A spousal RRSP can help to reduce your combined tax burden

RRSP—Do You Need One?

Yes…and no. An RRSP is a sound investment, but if you’re company offers an outstanding pension, you may not need one. However, it’s best to have one for security.

The only people who truly don’t need to invest in an RRSP are government workers such as teachers, civil servants and police. They’re afforded access to some of the best pension plans, and so don’t require the additional help an RRSP can offer.

Securing Your Retirement

RRSPs remain one of the best savings plan Canadians can invest in to prepare for retirement. The sooner you open one and begin making contribution the better, as tax-deferred RRSPs can grow faster. While this growth may not seem like much in the short term, in the long run it’s highly beneficial.

There is also a finite period you can contribute to an RRSP, with 71 years being the cut off. At this point in time you have three choices:

  1. Completely cash out your full investment—the larger the overall contribution, the more you’ll be taxed
  2. Transfer your RRSP(s) to an annuity
  3. Switch your RRSP to a Registered Retirement Income Fund or, RRIF

More Options Are Available     

RRSPs aren’t the only savings options available for those collecting a steady income, but they’re one of the oldest and best known. Regardless of what kind of investments and savings plans you decide on, what’s most important is that you have a plan for retirement and you get working on it as soon as possible. The more savings you can put aside, the more you’ll be able to do in your well-deserved retirement.

For employers, offering employees access to an RRSP is one way to boost your total compensation, it’s also a great additional benefit that will support your employees after they leave your organization for retirement.

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Lisa Curic

Lisa Curic

Lisa brings almost 30 years of experience to her role as the executive vice president at GroupQuest Benefits Resources Inc. She has worked for several different insurance businesses and co-founded a group benefits MGA in 2006. Lisa’s dedication and hard work has played a significant role in growing GroupQuest from two to over 40 employees in less than 10 years, and in making it one of the largest group benefit MGAs in Canada. Outside of her busy work schedule, Lisa enjoys reading, travelling, working out, cooking, and spending time with her husband and two children.

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