Through their workplace, some Canadians now have the option of opting into and contributing to a Group TFSA (Tax-Free Savings Account), in addition to a Group RRSP (Registered Retirement Savings Plan).
Group TFSAs are a newer and lesser-known product. And many employees don’t know if their employers offer it and/or when it’s a better option than the popular Group RRSP.
“It’s true. Group TFSAs are a ‘newer product’ and Canadians have been slower to adopt,” says Alex Mazer, co-founder, and co-CEO of Common Wealth, a financial technology company that specializes in retirement plans. However, Mazer has seen great success for clients who are modest-income earners (making less than $50,000 per year) utilizing Group TFSAs over Group RRSPs.
Let’s dig into when to consider Group TFSA versus Group RRSP.
When Group TFSAs are the Best Option
There are two main factors here: Earnings and what you’re investing for.
Consider Income Now and In Retirement
“Modest earners are likely better off with a Group TFSA,” says Mazer. Especially if they don’t have a workplace pension or a large RRSP account.
He adds that they’re if they’re in a lower tax bracket, an RRSP deduction isn’t worth as much. For example, within Canada’s 2023 Federal Tax Brackets for Persons earning $53,359 or less are taxed at 15%, and it’s almost double that at 29% for persons earning between $165,430 and $235,675.
Mazer points to the Guaranteed Income Supplement (GIS) as another reason. If the earner may qualify for GIS (the monthly payment for low-income Old Age Security (OAS) pensioners), it doesn’t usually make sense to save via RRSP; ultimately the person may lose some benefits because of the income from it. Plus, the RRSP must be converted to a RRIF in the year the person turns 71 years old. And every dollar withdrawn for a RRIF after the age of 65 reduces the GIS by a minimum of 50 cents.
What Are Your Investment Goals?
“If it’s a short-term to medium-term goal, Group TFSAs can be a good idea. If you’re looking to buy a house or go on vacation – purpose is important,” says Evan Parubets, Head of Advisory Services Team, Steadyhand Investment Funds Inc.
Other goals that work well with a Group TFSA include investing money for school or to help out a family member in the future.
When Group RRSPs are the Best Option
If you’re already able to achieve those short and medium-term goals, you may be earning enough that you can aim for an immediate tax break. “Those in a higher tax bracket, often prefer Group RRSPS, because they get more tax deduction per dollar. RRSPs get bigger bang for your buck,” says Parubets. Mazer agrees: “Higher income earners—RRSPs make more sense and then TFSA can be a useful top-up vehicle.”
Of course, RRSP contributions are tax-deductible in Canada. The amount contributed to an RRSP can be deducted from the contributor's income for tax purposes, ultimately reducing the amount of income tax owed.
Here’s more on the nitty-gritty of RRSPs.
Moving Forward with a Group TFSA
One thing to keep in mind: “Group TFSAs are identical to TFSAs in all aspects including the tax treatment, the contribution limits and the allowable investment options,” says Parubets.
He points out that it’s a good idea to research the vesting or termination restrictions on the individual product you’re considering with your employer.
Food for Thought on Fees and Regulation
“Overall, Group TFSAs like Group RRSPs tend to have lower fees than a typical retail option, and you’ll likely be able to access higher quality investment options that aren’t available to individual investors,” says Mazer.
Mazer also believes there is more consumer financial protection in any group plan versus an individual plan due to Capital Accumulation Plan (CAP) Guidelines– which typically have more rules around fee disclosure, investment product appropriateness and education.
It will be interesting to see if Group TFSAs take off in the same way that Group RRSPs did. “And now that the FHSA (First Home Savings Accounts) has been introduced, don’t be surprised to see this as part of employer benefit options down the road,” says Parubets.
Qualified Investments for Group TFSAs
Ready to invest? Investments allowed in a Tax-Free Savings Account (TFSA) are generally the same as those permitted in a Registered Retirement Savings Plan (RRSP), but there are important restrictions to keep in mind, as we pointed out in a recent article.
As described in the Income Tax Act and its Regulations, they include money, GICs and other deposits, most securities listed on a designated stock exchange, mutual funds and segregated funds, bond, debt obligations of an exchange-listed corporation and those that have that have an investment grade rating.
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