With the labour shortage, more and more employers are contributing to the retirement plan offered to their employees. It's a great way to encourage employees to save for retirement. But did you know that a group TFSA is the perfect complement to your company retirement plan?
This little-known product offers many benefits to your employees and, most importantly, it will not cost you a penny! In this article, we will be discussing the benefits of a TFSA contribution and the reasons why you should implement one for your employees.
What is a TFSA Contribution?
The TFSA (Tax-Free Savings Account) is a registered savings account that enables individuals to invest money generating a tax-sheltered return (like an RRSP). However, TFSA contributions are not tax deductible (unlike RRSP contributions).
An individual can contribute up to $6,000 in a TFSA for 2022 (and up to $81,500 if he/she never made any contributions since 2009). As this is after-tax money, withdrawals are not taxable.
The money deposited in a TFSA can be invested in any type of investment offered by a financial institution.
A group TFSA is simply a TFSA offered as part of a group plan (for the employees of an organization). It features several benefits compared with individual TFSAs offered by banks/credit unions:
- Easy to budget as contributions are deducted directly from the employee’s pay
Favorable Management Fees
- Generally, fees are much lower than with individual TFSAs
- Same fees as for the retirement plan offered to employees
Diversified Fund Offering
- Access to reputable institutional managers
Comprehensive Account Management Through Retirement Plan Access
- Single access for all accounts
Should your employees contribute to the retirement plan or the group TFSA?
Several employers are wondering whether a group TFSA would be popular with their employees. Over the years, the TFSA contribution room has built up substantially ($81,500 in 2022) and there has been a strong increase in the number of companies offering this option to their employees. Also, more and more employees are asking for this opportunity.
However, determining whether the employee will be better off contributing to the TFSA will depend largely on his/her individual circumstances and savings goals. The following guidelines generally apply:
Employer Contributing to the Retirement Plan
- When the employer is contributing to the retirement plan, employees should generally prioritize this plan and use the group TFSA in second place.
Maxed-Out RRSP Contribution Room
- Once employees have used up their RRSP contribution room, they should then begin using their TFSA contribution room.
Low income Employees
- To avoid losing some social program benefits at retirement, these employees could be better off contributing to the group TFSA instead of the retirement plan. Consulting a financial advisor/planner is strongly recommended.
- The group TFSA is generally recommended for employees who want to put money aside to buy a good or service (vehicle, trip, etc.) or to build an emergency fund.
- If someone wants to save for retirement, it is generally recommended to prioritize the retirement plan (and top up with the group TFSA).
As you can see, the TFSA contribution can be an excellent choice in certain situations. But in any situation, it is recommended that employees consult a financial advisor/planner to determine the best approach for them.
Would you like to add a group TFSA to your retirement plan?
Nothing could be easier! Just contact your AGA advisor who will be pleased to open an account for you.
AGA advisors have the necessary expertise to guide you and your employees through this process. Do not hesitate to contact us today to discuss this option further.
Jimmy brings overs 20 years of experience in pension plans. After starting his pension career at the Ontario Teachers’ Pension Plan, he worked as DC Consultant for a large actuarial firm and two insurance companies before joining AGA. With his extensive pension experience, he has developed an acute expertise in the selection, the design and the implementation of pension plans. Jimmy provides his clients with both expertise and insight on their employee benefits.
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