Benefits of investing in group savings plans
Typically, employees who participate in a group savings plan make regular contributions from their paycheque and their employer may also make contributions on their behalf. The money in the plan grows tax-deferred, meaning employees do not have to pay taxes on any investment gains until they withdraw the funds.
Group savings plans can help make saving for retirement or other goals easier and more affordable by offering several key benefits.
Convenient payroll deductions
One of the biggest advantages of a group savings plan is that it offers a convenient way to save. Employees can elect to have a set amount of their paycheque deducted and deposited into their accounts on a regular basis. This makes saving easy and consistent.
Employer contributions
In many cases, employers will make contributions to their employees’ group savings plans. This can be in the form of matching contributions, where the employer matches a certain percentage of what the employee contributes, or profit sharing, where the employer contributes a set amount based on the company’s profits.
Either way, employer contributions can help employees boost their savings goals.
Tax advantages
Another key benefit of a group savings plan is the fact that the money invested grows on a tax-deferred basis. This means that employees do not have to pay taxes on any investment gains until they withdraw the funds. This can result in significant tax savings over time, especially if the investments grow at a healthy rate.
Professional management
When you participate in a group savings plan, your money is typically managed by a team of professional investors. This can allow you to take advantage of knowledgeable experts and helps to ensure that your money is working hard for you.
Diversification
Group savings plans typically offer a wide range of investment options, which can help to diversify your portfolio and reduce your overall risk. By spreading your money across different types of investments, you can help minimize the impact of any one investment’s performance.
Risk tolerance
When choosing investments for a group savings plan, you can typically select from a range of options that vary in terms of risk and potential return. This means that you can tailor your investment mix to align with your personal risk tolerance and financial goals.
Portability
If you leave your job, you may have the option to take your group savings plan with you. This can be beneficial if you want to keep your money invested in a particular fund or if you are not yet ready to retire. In some cases, you may even be able to roll over your account balance into a new employer’s plan. Learn more about Canada Life’s NextStepTM plan here.
What are some different types of group savings plans?
There are many different types of group savings plans in Canada. Two of the most common are Registered Pension Plans (RPPs) and Registered Retirement Savings Plans (RRSPs). Both plans offer tax advantages and can be a great way to save for retirement.
Other types of group savings plans in Canada can include:
Tax-Free Savings Accounts (TFSAs)
TFSAs are another type of savings plan. Contributions to a TFSA are made with after-tax dollars, but the money invested in the plan grows tax-free. This means that you will not have to pay taxes on any investment gains, even when you withdraw the funds.
TFSAs offer flexible withdrawal rules and can be a great way to supplement your other retirement savings. Multiple TFSAs are allowed if the combined annual contributions for all accounts don’t exceed the maximum annual TFSA contribution amount. The unused contribution room is carried forward indefinitely.
Non-registered savings plans (NRSPs)
NRSPs are savings plans that are not registered with the government. This means that they do not offer any tax advantages. However, NRSPs often have lower fees than registered plans and offer more flexibility in terms of how and when you can access your money.
Registered Pension Plans (RPPs)
RPPs are employer retirement plans that are registered with the government and are subject to provincial and federal legislation. Employers must contribute to the plan and employees may be required to contribute as well. The money is typically invested in a variety of different assets.
RPPs offer tax-deferred growth and can be a great way to save for retirement. Funds in the plan are locked-in (meaning they can’t be taken as cash, with some exceptions) and are to be used to provide a retirement income. There are two types of RPPs: defined contribution and defined benefit.
- Defined contribution: Under a defined contribution RPP, the amount of money you will receive at retirement is based on the contributions made to the plan and the investment performance of the assets.
- Defined benefit: Under a defined benefit RPP, the amount of money you will receive at retirement is determined in advance and is usually based on factors such as your salary and years of service.
Registered Retirement Savings Plans (RRSPs)
RRSPs are retirement savings plans that are registered with the government. Contributions to an RRSP are made with after-tax dollars, but the money invested in the plan grows on a tax-deferred basis.
This means that you will not have to pay taxes on any investment gains until you withdraw the funds. RRSPs can be invested in a wide range of options that are offered within the group RRSP.
Employee profit-sharing plans (EPSPs)
EPSPs are employer-sponsored plans that allow employees to share in the profits of the company. Both employees and employers can contribute to an EPSP. EPSPs are often used to attract and retain talent. EPSPs are not registered with the government. This means that they do not offer any tax advantages.
Deferred profit-sharing plans (DPSPs)
DPSPs are employer-sponsored plans that allow employees to share in the profits of the company. All contributions are made by the employer and employees are not allowed to contribute to a DPSP. Money invested in the plan grows on a tax-deferred basis. This means that you will not have to pay taxes on any investment gains until you withdraw the funds.
By pooling resources and taking advantage of tax breaks, group savings plans can be a great way to save for retirement. There are many different types of group savings plans that offer different benefits. Whether you choose an RRSP, TFSA, RPP, or DPSP, you can be confident that you are making a smart decision for your future.