Leaving Your Group RRSP?

If you work for a company that offers a group RRSP (Registered retirement Savings Plan) program, you’re luckier than you might realize. In Canada, only 40% of employers offer a group retirement plan. Of the companies that do, 85% offer employee matching where the employer contributes to the plan. 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 (with before-tax dollars) and the fact that group plans often offer investments with lower investment fees than most financial institutions combine to make group RRSPs a valuable tool when it comes to saving for retirement.

But what happens when leaving your group RRSP program? This is a question most commonly encountered by people leaving an employer for another job or who bite the bullet and decide to start their own business. I’m asked this frequently and thought I’d offer my thoughts.

Vesting

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 in your group 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.

The more then common mistake departing employees often make is to not transfer the funds. After a certain period of time, if the individual does not transfer their own funds, the account is retained by the group RRSP plan provider and moved to a non-employer specific account for common management and administration. I refer to this as the black hole.

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.

Options Statement

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, or
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.

Cashing Out

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 over 45% 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 retirement.

Transferring

When you transfer money from one RRSP account to another the funds stay tax-deferred and you won’t lose any of your contribution room. The RRSP provider may 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. 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.

The management fees charged on a group plan will be lower than the fees charged by financial institutions. If a new employer offers a group RRSP that permits transfers from other plans, then you might 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 an 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. Ultimately, it’s a balance between the rate of return, the advice received, and the fees paid.

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 (Registered Retirement Income Fund) 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 increases as you age but there is no maximum) 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.

The Bottom Line

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.