Free Money for Canadians!

Money
So they say
Is the root of all evil today
But if you ask for a rise
It's no surprise that they're giving none away

 - Pink Floyd, "Money" from the album The Dark Side of the Moon

So, are "they" really giving none away?  They are, and Canadians have some excellent sources of free money!

Group Registered Retirement Savings Plan (RRSP)

An excellent source of free money is a group RRSP where employers match employee contributions up to a certain amount (or percent).  This is one of the easiest ways you can earn free money.  

Now some of you might be thinking this is an obvious source of free money, but according to a 2023  SunLife study, 73% is the average participation but with some industries participation rates are as low as 57%.  SunLife also reported little change in participation from their 2021 report. It seems that many employees are not getting the message and so it's worth repeating. With that, let's dive in.

A group registered retirement savings plan (RRSP) is a company-sponsored plan often offered by employers. Group RRSPs are easy to set up and administer (plans are usually administered by a third-party insurance company, bank, or brokerage) and are less regulated than full pension plans.  They have become a popular way for companies to provide some form of retirement savings program while also offering a valuable perk to attract and retain staff. Employer matching deposits are considered part of an employee’s salary, so they will be added as income and taxed, but employees also receive the corresponding tax deduction as they have been added to an RRSP.

The way group RRSPs work can vary from one company to the next. For example, the plan may be offered after a certain period, it may be optional, and might contain vesting periods or withdrawal limits.  For example, your employer may not allow you to move any money while employed, they may allow you to move only your own contributions, and some may allow you to move all of your funds.  Some employers will ramp up their matching contribution percentages based on your length of service.

Employees create their own RRSP account in the plan, and they usually have some decent choices in how to invest the money.  Most group RRSP plans offer a mix of actively managed funds like Canadian or U.S. equity mutual funds and so-called target-date funds.  Also, some discount brokerages are getting into the group RRSP game and are now offering diversified exchange traded funds (ETFs).  Because these plans are inside an RRSP, they are a great place to start a retirement savings journey with tax-free accumulation.  The plan also involves an automated direct deduction from the employee's paycheque which helps with saving consistent amounts over a long period of time, especially useful if you have trouble saving otherwise.

Just to be clear, if your employer has a group RRSP matching contribution program, you should absolutely be taking advantage of that program above all other saving priorities.  Think of it as just another part of your salary.

Speaking of maximum matching contribution limits, be sure to know what the rules are.  My former employer, for example, offered a 4% match on base salary but not on bonuses or commissions.  Using this 4% rule as an example, if you earned $80,000 per year, then 4% of that is $3200 per year and for every dollar you put in up to the $3200 maximum your employer would also put in a dollar.  If you had $3200 deducted from your paycheque through the year, then $6400 would show up in your RRSP. Free money!

Is there a chance I will exceed my RRSP limit for the year?

The maximum RRSP contribution limit for each year is 18% of "earned income" (employment income) in the previous year. For example, and using the employment income of $80,000 mentioned above, the annual limit would be 18% of $80,000 or $14,400.  You can also carry forward unused RRSP contributions from previous years.  There are penalties for over-contributing to an RRSP and they are quite steep at 1% per month.

So, unless you are already contributing to your RRSP through some other means, your employer matching portion would have to be more than about 9% of your salary.  With typical employer matching amounts ranging from 3-6%, it would be unlikely that contributions up to the maximum matching amount would exceed total yearly RRSP contributions allowable.  One thing to watch for, however, would be your first year with the company, coming off unemployment, or a big promotion you got early in the year.  

Let's say, for example, that in 2022 you earned $40,000 but you got a big promotion on Jan 1, 2023, to $80,000.  Your employer has a group RRSP match of 5% of wage.  Based on your previous year's salary of $40,000, your RRSP contribution limit for 2023 is 18% of $40,000 or $7200.  But, if you maximize your RRSP matched contributions, your RRSP contributions for the year would be 5% from you and 5% from your employer for a total of 10% or $8,000.  This is more than your allowable RRSP limit.  This is a bit of a corner case, but just something to be aware of and plan for.

As a side note, taxpayers at the age of majority have a $2,000 maximum lifetime over-contribution lifetime limit. You can't claim the over-contribution as a tax deduction, but you won’t face a penalty for it either.

Should I contribute even more than the maximum matching amount to the Group RRSP?

Assuming you are still under your yearly RRSP contribution limit and thus have room to contribute more, the answer depends on a few key factors.  Some things you might want to consider include:

1. Do I still need to build an emergency fund?  If yes, then do that next.
2. Do I have high interest consumer debt (like credit cards) that I could pay down? If yes, do this.
3. Should I invest in a TFSA instead?  If your income is below about $50,000 (as a general rule of thumb) you should probably contribute to a TFSA once you have reached the maximum employer matching contribution to the group RRSP. 
4. Would I still have the discipline to save more without the automated approach to savings available with the group RRSP? If yes, then move to the next question below. If no, then by all means contribute more.
5. What investment fees am I paying in the group RRSP? If they are high (let's say 1% or more) you may wish to look for lower fee alternatives.

For example, and for when I was working full time for my employer with a group RRSP, the answers to the above questions for me were 1 = No, 2 = No, 3 = No, 4 = Yes, and 5 = 1.05%.  In other words, additional contributions to my RRSP were both a good thing for me and I also had the discipline to ensure those contributions would be made.  However, I could do a lot better than the 1.05% fee being charged in my group plan.  That is, by using my discount brokerage to buy a low cost globally diversified asset allocation index ETF that had 0.25% in fees I could save 0.8% in fees compared to the group RRSP.  The ETF was also roughly the same type of investment too, so I wasn't losing out in any way.

So, wrapping this up...if you are not participating in your company's group RRSP matching program, start now and contribute to the maximum company match allowed. If you are unsure if your company has a group RRSP plan, just find out with a simple email to your HR or payroll coordinator.

Registered Education Savings Program (RESP)

A registered education savings plan (RESP) is an account where parents and guardians can save and invest for their children’s post-secondary education. The Interest and investment income earned on the savings accumulate tax free within the RESP too.

RESP plans can have a lifetime maximum of $50,000 per child and if the child is under 17 years old, the federal government will also top up contributions by 20%, up to $500 per child per year. This is called the Canada Education Savings Grant (CESG). Depending on where you live, your provincial government may contribute a grant as well.

In other words, you can get free money (20% on every dollar you save to a maximum of $500 each year, with greater amounts for low income Canadians) by saving for your child's post secondary education.

Now, there are lots and lots of rules and regulations with RESPs and so I've included links to a couple of good articles below. Don't let this deter you though - RESPs are still very easy to setup and they offer a 20% premium on your savings courtesy of the federal government. 

https://www.moneysense.ca/glossary/what-is-an-resp/

https://www.moneysense.ca/save/investing/resp/how-do-resps-work-and-whats-the-best-way-to-fund-them/

Old Age Security and Guaranteed Income Supplement

Old Age Security (OAS) is a federal-run benefit program for eligible Canadians. Canadian citizens and legal residents aged 65 years and older can receive OAS, even if they’re still working or have never worked.  Eligible Canadians get an amount based on years of residency in Canada and if you've lived in Canada for at least 40 years you will get the maximum amount.  Finally, if you earned more than $86,912 in 2023, then payments are reduced by $0.15 for every OAS $1 paid (often referred to as the "OAS clawback").

What many don't know is that you can defer the start of OAS up to age 70 if you like.  For every month OAS is deferred after age 65, it increases by 0.6% (or 7.2% per year).  OAS is also indexed to inflation and adjusted every quarter as well.

There is much to talk about with OAS - what the rules are, when to take OAS (right away at 65 or not), and how to avoid clawbacks.  There are useful resources on the web for this and it may also be an article on this blog for another day.

The Guaranteed Income Supplement (GIS) is also a federal benefit program to low-income Canadian residents aged 65 and older. To qualify, you must be receiving OAS and have a maximum income below a certain threshold which varies depending on your marital status, and whether your partner receives OAS and GIS payments.

GIS comes with some very high “clawback” rates which can reach 50% to 75%. This curiosity makes low-income retirement planning very important and where traditional financial advice is often incorrect.  Sadly, low income individuals often have little access to good financial advice and suffer the consequences of GIS clawbacks.

Like OAS, there is much to talk about with GIS - what the rules are and how to avoid clawbacks.  GIS may also be an article on this blog for another day.

Other Sources of Free Money

Both the Canadian Federal government and provincial governments offer grants and incentives to average Canadians from time to time.  Here are a couple of federal programs that are active as of time of this article's posting date plus a generic federal grant finder page:

Canada Greener Homes Initiative

Incentives for purchasing zero-emission vehicles (canada.ca)

Grants and funding from the Government of Canada - Canada.ca

Thanks to some excellent feedback for readers, I've added to more sources of free moey as amended on November 1, 2023.

Registered Disability Savings Plan (RDSP)

A registered disability savings plan (RDSP) is a long-term savings plan for Canadians who have been approved to receive the federal disability tax credit. It is a similar concept to an employer's pension plan (in fact it is for the purpose of supporting people with severe disabilities in retirement) where the Canadian federal government matches contributions the individual makes to their own plan.

There are several yearly contributing rules based on age of the individual and income levels, but absolute free money waiting to be grabbed.   That is, a key benefit to opening an RDSP is matching grants from the Canadian government. The grant, called the Canada Disability Savings Grants (CDSGs), will pay a maximum of $3,500 a year and $70,000 in a lifetime, depending on things like the beneficiary’s adjusted family net income and the amount contributed. For low-income families, the government will also pay Canada Disability Savings Bonds (CDSB), up to $20,000.

Here is a great article from MoneySense for more details on the RDSP.

First Home Savings Account (FHSA)

The first home savings account (FHSA) was recently launched by the Canadian federal government on April 1, 2023.  More details are below, but in a nutshell, it works like this:  You contribute to the FHSA and claim the contribution for a tax break (just like an RRSP).  You invest those funds, and they grow inside the FHSA tax sheltered.  When you are ready to withdraw the funds for your home purchase you get to take it out tax free (just like a TFSA).

So, you get a tax break up front, and then you do not have to repay those taxes when you withdraw the funds if you buy a home.  More free money!

To be eligible for the FHSA, you must be a resident of Canada, at least 18 years of age and not turning 72 or older in the same calendar year.  You also must be a first-time home buyer meaning you didn’t own a home used as your primary residence for any part of the five calendar years before the account is opened.  The same must be true of your partner if you are married or common-law.

You can contribute up to $8,000 to your FHSA per year and carry forward up to $8,000 of unused contribution allowance for exactly one year after the account is opened. The lifetime contribution limit is $40,000.  You can invest those funds into most things like stocks, bonds, ETFs, GICs, Cash, etc.

Here is a link directly to the federal government’s FHSA web page to learn more.