I recently came across a car forum post about a friend who wasn’t contributing to their company RSP plan. This person said he didn’t contribute for two reasons:
- Effort – he didn’t want to take five minutes to fill out the paperwork.
- Lack of trust – he didn’t believe company matching at 4% was actually “free” money.
I want to dispel a few myths and bring light to what is a very popular way to save money, since the days of the Defined Benefit Pension Plan (DBPP) are gone and we now live in a world of Defined Contribution Pension Plans (DCPP).
What’s the difference between the DBPP and the DCPP?
In a DBPP the company promises you a set pension amount at your retirement, usually based on a formula that includes years worked and average salaries. A DCPP is your group RSP account at work. You contribute to it, decide where the money is invested and the company matches your portion up to a certain percentage (if you’re lucky).
Some options at retirement include purchasing an annuity, rolling the funds into a Registered Retirement Income Fund (RRIF) or possibly taking the funds as cash. It’s best to consult your financial advisor and company plan details for a full summary of your options.
How much paperwork is there?
The paperwork to be added onto a DCPP through your employer is fairly minimal and requires very little effort, as the investor. You’ll fill in some personal information, and decide how much you want to contribute, subject to applicable limits.
The hardest part is determining which funds to invest into. However, most companies have an investor profile, which will automatically tell you which fund(s) to invest in.
Is company matching “free” money?
Although company matching isn’t completely free, you’ll still come out ahead in the long run. Think about this: if you invest 4% of your paycheque into a group RSP account, it comes out before taxes are deducted from your pay, resulting in a smaller tax deduction and more money in your pocket. Now add in your company’s 4% matching portion (a taxable benefit to you) and your overall tax position has stayed relatively the same compared to not investing anything. However, you now have 8% of your salary invested in a Group RSP account compared to nothing by not participating in the company matching option.
Would you rather keep more money in your pocket or pay it in taxes to the government?
Don’t miss out on the opportunity to invest for your retirement today, because we all know your company isn’t going to pay for your retirement if you don’t save enough. That’s up to you!