What Are Individual RRSPs?
An individual registered retirement savings plan (RRSP) allows you to grow your investments tax-free. Registered with the federal government, individual RRSPs offer a number of unique benefits that can help individuals save more for their future.
An individual RRSP is one of the most common types of personal savings plans. Individuals — as well as their spouses or common-law partners — can contribute to these plans up to an annual limit using a mix of investments, including stocks and mutual funds. What's more, individual RRSPs have two tax benefits that help you save for your retirement:
- Tax-Sheltered Growth: Investment income in your RRSP isn't taxed while within the plan. In most cases, investors won't have to pay any tax until funds are withdrawn. Because you may be in a lower tax bracket once you're ready for retirement, your total savings can be significant.
- Tax deductions: Individual RRSPs can be used to reduce your tax, as contributions are deductible within specified limits.
In addition to the above benefits, investors can withdraw funds from their individual RRSPs without being penalized, provided the money is repaid by a specified time. This can be particularly useful for large purchases, like buying your first home or paying for your education.
There are a number of qualifications you must meet in order to open an individual RRSP. Simply put, if you have earned income and file an income tax return in Canada, you can contribute to an RRSP until December 31 of the year you turn 71. You must also have contribution room available, which will be stated on your annual Notice of Assessment sent by the Canada Revenue Agency.
What Are Group RRSPs?
A group RRSP is an employer-sponsored retirement savings plan. These plans are similar to individual RRSPs, but are instead managed on a group basis by an employer. Specifically, group RRSPs are looked after by insurance companies, mutual funds or banks — employers and employees simply cover any plan management fees.
Under group RRSPs, contributions are made through an administrator on a pre-tax basis via direct payroll deductions. Employees can choose whether or not to enroll in a group RRSP and how much they would like to contribute. Often, employee contributions are matched.
Employees will receive an eligible tax deduction for the amount contributed. It should also be noted that employer contributions are tax-deductible and seen as a taxable benefit.
Other benefits of group RRSPs include the following:
- Group RRSPs provide immediate tax relief for employees.
- Group RRSPs have low administrative costs compared to other investment options such as traditional pension plans.
- Group RRSPs have low minimum deposits, giving your employees access to investments they otherwise might not be able to acquire.
- Group RRSPs are not subject to provincial pension regulations, which provides built-in contribution flexibility for employees.
- Group RRSP contributions are employee-owned, meaning your workers can do whatever they want with the investment even if they leave your company. What's more, employers are not liable for guaranteeing a specific amount of income when an employee retires.
- Group RRSPs are an affordable way for employers to lower turnover rates, attract new employees and help workers save for their future.
Individual RRSPs are one of the best ways to save for retirement and ensure you are financially secure once you leave the workforce and Group RRSPs are an effective recruiting and retention tool for employers.
To get started or to learn more, contact Aaron today at (306) 684-1934.