If you work for a company that offers a group RRSP program to employees, you’re luckier than you might realize. In Canada, only 40% of employers offer a group retirement plan so, if you work for a company that does, you’re in the minority. Of the companies that do offer a plan, 85% offer some form of matching (where the employer contributes money to the plan) so if you do have the opportunity to participate in a plan, I strongly encourage you to take advantage of it.
The employer matching, the opportunity to ‘pay yourself first’ directly off your paycheque (often with before-tax dollars) and the fact that group plans often offer investments with lower investment fees (MERs) than you would pay through a bank or financial advisor combine to make workplace savings plans a valuable tool when it comes to saving for retirement. But what happens when leaving your group RRSP program? This is a question I’m asked on a frequent basis and so I thought I’d cover some thought on the topic in this week’s post:
The most common reason for a member to leave a group RRSP program is that they stop working for the employer. Whether you’re asked to leave or choose to leave the company, your options for the money inside your RRSP account will be the same. Any money contributed to a RRSP account, whether it comes from the employee or the employer, is immediately vested. That means the money belongs to you from the moment it hits your account and, if you leave the plan, all of the money goes with you, none of it will be returned to the employer.
Sometimes companies will set up their group retirement plans as a combination of a RRSP and a DPSP (Deferred Profit Sharing Plan) where employee contributions go into a RRSP account and employer contributions go into a DPSP account. In this case, employers can require that employees are a member of the plan for a certain period of time (up to 2 years) in order for the money in their DPSP account to be vested. If you leave the plan before the vesting period, then any money in your RRSP account will go with you but anything in your DPSP account will be returned to the employer.
When a member leaves their group RRSP program, the employer notifies the plan provider and, once the member’s last contributions have been made from their final paycheque, the provider will send them an options letter. The options letter will tell you how much money you have invested in the plan and will give you options for what you can do with the money: cash out the account, transfer it to another RRSP plan, convert it to a RRIF or purchase an annuity. Once you decide which of the options you want to exercise, you complete the relevant paperwork and return it to the plan provider to be processed.
You can withdraw money from a RRSP account at any age but, because you’ve never paid tax on any money in the account, anything you withdraw is considered income and is taxed at your marginal tax rate. Depending on your income for the year and the province you’re employed in, you could find yourself paying up to 48% in taxes.
Some of this will be withheld by the plan provider and submitted to CRA on your behalf and the remainder will be due when you file your taxes. While everyone’ personal circumstances are different, if you can avoid cashing out while you’re working, you’ll pay less tax, retain your RRSP contribution room and allow your money to keep working for you until you need it in retirement.
When you transfer money from one RRSP account to another the money stays tax-deferred and you won’t lose any of your contribution room. The RRSP provider will usually charge an exit fee for moving your money but you’re unlikely to encounter deferred sales charges or other penalties because the majority of investments offered through group RRSP plans are offered on a “no load” basis. Note that transfers are not considered a new contribution so you won’t get a tax receipt or a tax refund on the transferred amount because you already received that when you made the original contribution to your original plan.
When it comes to deciding whether or not to transfer money away from the group plan provider, I usually base my decision on where I’m going to pay the lowest investment fees. All investments have an embedded management fee (often known as a MER or IMF), however because these fees aren’t always disclosed on statements it can be tricky to find out how much you’re paying. Often, the management fees charged on a group plan will be significantly lower than the retail fees charged by banks and financial advisors and so your money will likely work harder with your group plan provider than it will if transferred to a RRSP at the bank. However, if your new employer also offers a group RRSP that permits transfers from other plans then you might well find that their plan fees are equal to or lower than the fees you were paying with your previous plan.
If the fees are similar, or you have a good relationship with your advisor, or you like the idea of having all your retirement savings in one place then there’s nothing ‘wrong’ with transferring your money. At the end of the day, it’s yours and you have the final say in what happens to it.
RRIFs and annuities
If you’re retiring and your intention is to use the money in your group RRSP to provide income in retirement then you might want to consider converting your RRSP account into a RRIF or purchasing an annuity. Both will provide a steady source of income in retirement but the amount you receive and the length of time it will last, depends on a number of factors including your account value, age and income requirements.
An annuity is intended to provide a steady amount of income for life. However, with interest rates at historic lows, now might not be the best time to purchase an annuity because the amount you receive is based on the interest rates at the time you purchase the annuity and won’t increase if rates go up in the future. A RRIF gives you more flexibility to adjust the amount that you receive (there is a minimum amount that you have to withdraw each year which increase as you get older but there is no maximum limit) but depending on the value of your account, how it’s invested and your withdrawal rate, there’s a risk that your money might not last for your lifetime. This is why taking the time to consult a financial advisor you trust and coming up with a retirement income plan that meets your needs is a key component of retirement planning and one that should be started several years before your intended retirement date.
At the end of the day, group RRSPs are a great way for people to save for their retirement. Sometimes people are hesitant to enroll in a plan because they’re not sure how long they might stay with the employer. However, with many plans offering what is essentially free money through matching contributions, and knowing that you have the ability to retain anything that’s in your group RRSP account if you leave your employer there are definite advantages to enrolling, if you have the opportunity to do so.