Many workers in Canada are getting more and more worried about how (or whether) they’ll retire. With rising costs of living, it can sometimes feel like there is no light at the end of the tunnel for many Canadians.
As an employer, helping your workforce think about retirement and letting them learn about retirement plans is an option that can set you apart as a boss invested in their well-being.
Let’s get to know a bit more about RRSP savings in Canada and what you have to do to help your workers save for retirement.
What Is an RRSP?
An RRSP, or Registered Retirement Savings Plan, is a retirement savings plan for Canadian residents and their common-law partners or spouses. It is similar to a 401K in the US. Under RRSP plans, the income you earn isn’t taxed as long as it remains in the fund.
What do RRSPs do? They are designed to encourage people in Canada to save for retirement by offering tax benefits. Both employees and employers need to make a few key considerations when thinking about RRSPs. Here’s a short rundown of how the RRSP works:
Employees can pay into RRSPs to help them save cash for retirement. An RRSP comes with
Income Tax Deductions and Deferrals
When you contribute to an RRSP, you can deduct the amount of your contribution from your taxable income for the year you contribute. There is an annual deduction limit based on your previous year's salary. Even so, this can help lower your overall tax liability and potentially qualify you for a tax return.
Any income earned in an RRSP (interest, dividends, capital gains, etc.) is tax-deferred. What does this mean? Tax deferral means you won't pay taxes on money in an RRSP until you take your cash out of the account. This usually happens during retirement (people often make less money during this time).
Withdrawing funds from your RRSP means anything you take out is considered taxable income. But because RRSPs are typically used in retirement when your income often drops, you may be in a lower tax bracket, and potentially save on tax.
This being said, early withdrawals from an RRSP can mean penalties and tax consequences if you’re not careful. To maximize the benefits of an RRSP, make sure you consult with a financial advisor or tax professional to build a strategy that aligns with your retirement goals and financial situation.
Contribution Limits
Is there a cap on how much you can pay into an RRSP? Yes! There is an annual limit. The annual RRSP contribution limit is based on your earned income and can change yearly. If you pay too much into your RRSP, you can face financial penalties, since the system collects money that is not taxed at source.
Investment Types
So what types of investments go into your RRSP? RRSPs can hold a variety of investments, like stocks, bonds, mutual funds, GICs (Guaranteed Investment Certificates), or others. By being flexible in the way RRSP payments are divided, people who contribute can build more diversified retirement portfolios.
Why will this help you if you choose to pay in? This is useful in the case of market ebbs and flows that may impact some types of investments or funds more than others.
Early Withdrawal Plans
Does it always cost you if you want to take money out of your RRSP? In some cases, you can withdraw RRSP money without a financial penalty.
Right now, the Home Buyer’s Plan (HBP) withdrawal limit is $35,000, which applies to withdrawals made after March 19, 2019.
This initiative helps Canadian homebuyers withdraw early from their RRSPs to pay for training, professional development or further education.
Mandatory Conversion
After you turn 71, at the end of that year by December 31st, your RRSP needs to be converted into a Registered Retirement Income Fund (RRIF) or used to purchase an annuity.
What are annuities? An annuity is some sort of financial product giving you a guaranteed income, a common example being life insurance. Withdrawals from an RRIF are subject to minimum annual withdrawal amounts and are taxable.
Spousal RRSPs
Who can contribute to RRSP in Canada? Married or common-law couples can contribute to a Spousal RRSP. Under this plan, one spouse can pay into an RRSP in the other spouse's name, so retirement funds equalize. Spousal RRSPs also help provide tax benefits.
How Do RRSPs Impact Employers in Canada?
So with the scope of what an RRSP is in mind, how could this impact you as an employer in Canada rather than someone paying into this type of retirement plan? Employers have a few responsibilities when it comes to RRSPs that are different from an employee paying into a savings plan.
There are a few things you should be aware of relating to RRSPs if you offer them as part of your employee benefits or are considering your role in managing employee retirement savings. Here are some important considerations for employers:
RRSP Matching
How do employer matches work? Although they’re not mandatory, an employer can cover a matching contribution equal to their employee's contribution to RRSPs. An employer match can make a huge difference for their staff, making it an important employee benefit. Also, employer contributions can serve as a major incentive for employees to think about starting to save for retirement.
Matching contributions can be a fixed dollar amount or a percentage of the employee's contributions. Usually, employers tend to pay 3-5% of an employee’s salary before tax. Sometimes employer payments are subject to a maximum limit.
To get a sense of best practices for employer matching, you must do your market research and see what percentages others in your industry offer their workers. This will help make sure you’re not undercutting your workers and that you’re staying compliant as well.
You also help set yourself apart as a superstar employer by helping your workers prepare for the future!
Voluntary Employee Contributions
Usually, RRSPs are voluntary, so employees can choose whether or not to contribute to them. Employers cannot force employees to participate in an RRSP program. Despite this, it is a good idea to encourage your team to take control of their financial planning for retirement. Advocating for better employee knowledge of their finances means you’ll build a savvier workforce.
If an employer offers an RRSP program, they can manage employee contributions through payroll deductions. This lets employees contribute a cut of their salary directly to their RRSP, so it’s convenient and systematic.
Ask your employees what percentage of their regular salary they’re comfortable with putting aside into an RRSP. If setting aside money from their regular pay for retirement leads them to feel like they can’t afford important costs of living, this can be a good check-in time between you and your workers to make sure you’re paying them reasonable salaries.
Group RRSPs
Are RRSPs always for one user or a user and spouse only? Employers can set up group RRSPs, which are RRSP accounts for employees within the company.
Under these plans, each employee who is a member of the group gets to choose how they invest their money. Generally, group RRSPs have lower fees and more investment options than individual RRSPs. They also make it easier to negotiate with financial institutions to advocate for terms that better serve your workers.
For a group RRSP to work, you’ll need to consider factors like how long an employee’s been with the company and what amount they want to contribute individually to the group fund.
Administrative Responsibilities
As an employer, which aspects of documenting an RRSP are you responsible for? Employers who offer RRSP options to their staff are responsible for most admin tasks relating to the program. These include setting up the plan, managing contributions and withdrawals, coordinating with banks, and overseeing compliance.
You also need to report RRSP contributions made on behalf of employees on their T4 slips, which are used for tax purposes. When the time of year rolls around for your workers to file their taxes, they must have their T4s on hand! Accurate record-keeping will help you and your team meet reporting obligations. Employers should provide employees with written information about the RRSP program, including details about contribution options, investment choices, and any employer-matching contributions. Make sure you’re communicating clearly to help employees make informed decisions about their retirement savings.
Vesting Periods
As an employer, you’re allowed to impose what’s called a “vesting period”. This is when employees need to stay with the company for a certain number of years to become eligible for employer-matched contributions.
Why do employers hold vesting periods? These time allotments are designed to encourage employee retention. Try to think of fun ways to incentivize your workers to make it through the vesting period and be eligible for RRSP.
If you introduce an element of friendly competition or roll another perk into the time that an employee hits the time requirement to be considered for RRSP, you may help encourage them to stick around longer and put in more time for your company.
Regulatory Compliance and Fiduciary Responsibility
Does your RRSP program comply with all relevant laws and regulations, including those set out by the Canada Revenue Agency (CRA)? As an employer, it’s your job to make sure! If you fail to meet regulatory requirements, you may be subjected to penalties and legal issues.
Employers are responsible for acting in the best interests of their employees when managing group RRSPs. That means selecting relevant investment options and monitoring the performance of their selected RRSP plans.
Employers play a crucial role in educating employees about the benefits of RRSPs and retirement planning. Giving your team access to financial education resources helps your employees make informed decisions about their retirement savings.
Overall, it’s important that you carefully consider the design and rollout of your RRSP program as an employer. Take into account the needs and preferences of your workforce and factor them in when you make any decisions that could impact their income. Guidance from financial advisors or legal counsel is also a good idea and can benefit your compliance efforts. This will help you provide relevant retirement benefits with real value to your employees.
Risks of RRSPs
Does offering your employees RRSPs come with risks or compliance considerations for you, as an employer? Yes, but with some forethought you can manage them efficiently. Here are a few to think about:
Tax on Withdrawals
When you withdraw funds from your RRSP, they’re considered taxable income. This means employees will owe income tax on the withdrawals, which can reduce their retirement income.
If your income in retirement stays high due to major RRSP withdrawals or other sources of income, you could end up paying higher taxes than expected.
Less Contribution Room
Contributions to an RRSP have annual limits on the income an employee earns. If you pay in too much or take money out of an RRSP too early, it may cause employees to lose contribution room and face penalties. No one wants to deal with monetary punishments and it can often lead to greater financial stress, so it’s a good idea to closely monitor how much you’re putting into the RRSP.
Market Risk
The investments in an RRSP tend to fluctuate with the market, and there's a risk that a portfolio can decline in value, especially if you're invested in certain equities such as stocks.
Limited Accessibility
RRSPs are mostly designed for retirement savings, and early withdrawals are subject to withholding taxes and other potential penalties. This can limit your access to that money for things like health or personal emergencies and other financial needs. As we mentioned above, by the end of the year you turn 71, and you need to make sure you switch your RRSP into an RRIF or buy an annuity. Otherwise, you can end up dealing with mandatory minimum withdrawals and tax implications.
Discuss RRSPs with Your Staff
Don’t be scared to talk to them about their financial circumstances! That includes current and future income, financial goals, and risk tolerance when thinking about offering them RRSPs or recommending them as a good retirement savings strategy.
Many Canadians use RRSPs as a core component of their retirement planning, but you should also encourage your workers to diversify their retirement portfolio. Diverse methods like Tax-Free Savings Accounts (TFSAs) and non-registered investments can help manage taxes and financial risks effectively.
Getting together with a financial advisor to explain these considerations can help you come up with a retirement plan that aligns with your workers’ specific goals, needs, and financial savings targets! Make sure to loop them in to find out about their long-term goals after retirement in terms of lifestyle and how your plan can help them.
RRSP and EORs
An Employer of Record in Canada can also help you think strategically about using RRSPs as a work benefit for employees. They can assist with RRSP management, mainly in dealing with the admin aspects of employee benefits and retirement savings. Here's how an EOR service can help with RRSP management for both you and your employees:
Administration and Compliance
Do you dread doing paperwork regularly? It can seem like factoring in RRSP calculations on top of the work you’re already doing for administrative tasks will keep you more bogged down than you’d like.
EORs can handle the administrative responsibilities associated with RRSPs, like planning setup, enrolling employees, managing contributions, and maintaining compliance with regulatory requirements. This includes keeping track of contribution limits and reporting contributions accurately.
- Reporting and Compliance: EORs can generate reports related to RRSP contributions and compliance, so it’s easier for employers to meet regulatory requirements and provide the necessary documents for tax purposes.
- Benefits: EORs often manage multiple employee benefits programs, including RRSPs. They can help integrate RRSP management with other benefits like health insurance, retirement planning seminars, and employee assistance programs (EAPs), so you get a more holistic approach to employee benefits.
- Fiduciary Responsibility: EOR services can take on a fiduciary role. That means they’ll work to create a system to manage the RRSP program in the interests of employees in good faith. EORs can help you pick strong investment options within the RRSP plan.
- Payroll: EOR services often offer payroll processing as part of their HR and benefits administration packages. That means they can quickly and easily deduct RRSP contributions from employees' paychecks and remit those contributions to the RRSP accounts.
Employee Education and Plan Administration
Employment offers several ways for employees to enrich their skill sets and gaining a good grounding in managing personal finances should be no different.
When it comes to RRSPs, EORs can give you further educational resources and materials to help your employees understand the benefits of the program, how important retirement planning is, and how to make informed investment choices through the RRSP. This can lead to more employee knowledge of how their money can work for them. You may begin to see a more participatory and engaged workforce!
- Plan Management: EOR services can help you select and manage the RRSP plan itself. For employers, EORs can help choose the best fit RRSP provider, negotiate terms, and make sure the RRSP plan aligns with your company's objectives and workforce goals.
- Employee Communication: Good communication is key in making sure employees know about the RRSP program and understand how it works. An EOR service can help you communicate the benefits, enrollment procedures, contribution options, and any employer-matching contributions to your employees.
- Scale: Should your RRSP planning strategy grow as your business does? If your answer is yes, with an EOR you can also scale your RRSP management strategies to accommodate the changing needs of your growing business. Whether you’re adding new employees to your team or expanding the scale of your regular operations, EORs are flexible and able to adapt to the RRSP program according to how your business would like to grow.
- Cost-Efficiency: Outsourcing your RRSP management to an EOR can be more cost-effective for some businesses. It lets you take advantage of expert services as an employer with no need to hire and train in-house HR and benefits staff.
How Can Borderless Help?
Overall, an EOR service can streamline RRSP management, decreasing time-consuming admin tasks for you as an employer and making sure your employees get access to a relevant retirement savings program. For businesses that want to offer competitive employee benefits packages while staying compliant with labor laws and regulatory requirements, this can be a huge help.
Speak with our team to learn more about how Borderless can help your RRSP management strategy.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
