You’ve been lucky enough to have a job where your employer contributes to your retirement plan, but what happens when you change jobs? Too many people just close the account because they do not realize they have options. Closing your account may be easy, but it can rob you of future interest on your funds, and it can significantly cost you at tax time.
This article will give you a brief overview of your options when it comes time to manage your work-sponsored retirement plans. This is just a starting point. Be sure to enlist the help of your financial planner to ensure you are in compliance with Canada Revenue Agency (CRA) and making the best decisions for your financial future.
What is a group retirement plan?
A group retirement plan is established and administrated on your behalf by your employer. Your employer remains in compliance by following federal and provincial regulations and reporting when necessary to CRA and other governing authorities. As an employee you are given statements or information on your pay stub regarding the monies in your group plan.
Contributory and non-contributory
There are two types of group retirement plans: contributory and non-contributory plans. Contributory is when the employer and the employee both contribute to the plan. A payroll deduction is used for the employee’s portion. Non-contributory is when the employer alone contributes to the plan.
Vesting – a term you need to know
Your group plan may have a vesting period. This is the period of time where you will not receive the employer’s contributions if you leave the company. You will, however, retain your contributions as an employee. This helps the company defray their financial risks. Vesting periods vary but two or three years are typical.
Types of plans and how to handle them when you leave the company (but do not retire)
- Defined benefit pension plan (DBPP) or defined contribution pension plan (DCPP): this type of plan can be transferred to another locked-in fund, or to the new employer’s group plan.
- Group registered retirement savings plan (GRRSP): transfer the value to your individual RRSP, RRIF, or new employer’s group plan.
- Deferred profit sharing plan (DPSP): transfer the value to your individual RRSP, RRIF, or new employer’s group plan. You can also use the funds to purchase a life annuity.
- Group tax free savings account: transfer to your individual TFSA.
Why not just cash out?
Cashing out your funds is an option. However, depending on the type of plan this many significantly impact you at tax time. Funds treated as income by CRA are always subject to taxes, and some retirement plans have penalties for cashing out early.
Make an informed decision
The treatment of your old retirement plan must take into consideration your current financial status, how close you are to retirement, your future goals, etc. Speak with a professional financial planner to ensure you understand all of your options, and that the plan you choose is the best one for minimizing tax load, preserving your investment, or defraying a current financial situation.