Getting the most from a group RRSP

Canadian Capitalist has a nice post on the benefits of participating in an employer group RRSP. The gist is that, if your employer provides a match to your contributions, then you are leaving money on the table by not signing up for the plan. Many personal finance experts list this as a priority even while paying off debt: contribute enough to your employer's retirement plan (group RRSP for Canadians; 401(k) for Americans) to get the maximum employer match.

My employer has a group RRSP in which they match half of employee contributions, up to an annual maximum. In my case, the employer match is only available for purchases of the company stock. We also have a portfolio of low-MER mutual funds that we can contribute to through payroll deductions, but there is no match on these funds. Still, having an immediate return of 50% on my investment every two weeks is a great deal, even if it is all invested in my employer's stock. Unless the value of the stock suddenly drops by more than 30%, I end up ahead.

One of the benefits given by Canadian Capitalist is the up-front tax refund you get if you contribute to your employer's group RRSP through payroll deduction. Because you're making the RRSP contribution directly from your paycheque, your employer withholds less income tax, so the impact of the deduction is lessened. Plus, you aren't making the dreaded interest-free loan to the government.

Of course, this up-front tax refund also means you aren't in for a juicy refund cheque when you file your taxes in the spring, because you've already realized the tax savings. The RRSP advertising through January and February of every year is counting on the appeal of a big tax refund resulting from a lump-sum contribution to bring your money through the bank's door. However, if you've been contributing a portion of each paycheque all year long, you may not have this lump sum available.

There is a way you can "trick" yourself into giving yourself a refund for your group RRSP contributions. If you multiply your paycheque deduction by your marginal rate, and set up a recurring transfer of the resulting amount to an online savings account, then when tax season comes around, you will have a virtual tax refund sitting in this account.

For example, if you contribute $150 every two weeks to your employer's group RRSP, and your marginal tax rate is 40%, then you would set up a bi-weekly transfer of $60 to an online savings account. At the end of the year, not only will you have $3,900 (plus applicable employer match) in your RRSP, but you'll have $1,560 sitting in a savings account, as your reward for saving so well.