There are many Canadians who are struggling to make ends meet right now and the idea of putting money aside for their retirement might seem like an impossible dream.
But no matter how tight things are, contributing the maximum to their employer-matched retirement plan must be a top priority.
An employer-matched retirement plan, such as a registered pension plan (RPP) or a group registered retirement savings plan (RRSP), is the number one savings option for Canadians as it allows them to contribute to their retirement savings with the added benefit of employer contributions.
These matching programs are considered part of your employment salary and foregoing them is akin to voluntarily giving up a part of your pay.
Here are some compelling reasons why Canadians should maximize their contributions to their employer-matched retirement plans, no matter how tight things seem to be:
1. Employer-matched retirement plans are designed to incentivize employees to save for retirement by offering employer contributions. Typically, an employer will match a portion of the employee’s contribution to the plan, up to a certain limit. For instance, if an employee contributes $1,000 to an RPP, their employer may contribute an additional $500, bringing the total contribution to $1,500.
This matching contribution from the employer is essentially free money that can significantly boost the employee’s retirement savings. By forgoing these matched amounts, you are going to need to invest significantly more of your own money to reach the same goals.
2. Contributions to employer-matched retirement plans offer significant tax benefits as well. These plans are registered with the Canada Revenue Agency (CRA), which means contributions are tax-deductible. This can result in immediate tax savings, as contributions made to these plans are deducted from the employee’s taxable income. For example, if an employee earns $50,000 per year and contributes $5,000 to their RPP, their taxable income will be reduced to $45,000.
In addition, contributions made to these plans grow tax-free until they are withdrawn at retirement. This means that Canadians can benefit from tax-deferred growth on their retirement savings, which can significantly increase their savings over time. By contributing the maximum amount allowed, Canadians can take full advantage of these tax benefits and potentially reduce their tax bill. Tax refunds can be used to pay down debt or for other priorities.
3. Another compelling reason to maximize contributions to employer-matched retirement plans is the power of compound interest. Compound interest is the interest earned on both the principal amount and the accumulated interest over time. This means that the longer the money is invested, the greater the potential for compound interest to work its magic and grow the retirement savings.
By contributing the maximum amount allowed in your work sponsored plan, you will take advantage of the power of compound interest on not just the money you put in but also on the amounts your employer contributes too.
4. Contributing the maximum amount to an employer-matched retirement plan can also help people develop a savings habit. By setting aside a portion of their income for retirement, Canadians can create a forced savings plan that helps them save consistently over time. This can help prevent the temptation to spend money on non-essential items and instead prioritize savings for the future.
Contributing the maximum amount to an employer-matched retirement plan is a smart financial decision for anyone who has the opportunity to do so, regardless of their financial situation. While it may require sacrifices in the short term, the long-term benefits of contributing the maximum amount to an employer-matched plan far outweigh the costs. If you feel that freeing up cash-flow to do this is simply not possible, speak to a qualified financial planner to see how they can help.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.