Investing

Should we do employer matched RRSP contributions?

  • Last Updated:
  • Aug 30th, 2019 4:50 pm
[OP]
Member
May 24, 2014
202 posts
107 upvotes
Dartmouth, NS

Should we do employer matched RRSP contributions?

We are a one income family of 5, have a mortgage since 2016 with another 2 years left on the locked-in 5 year term of 2.89% interest, and another 22 years left on our 25 year amortization. This year, we will have paid roughly $3,500 on interest on our mortgage. We also have about $3,600 left on a $15,000 loan we had (we needed it to finish repairs on the foreclosure we purchased). We're in Halifax area of Nova Scotia.

What I'm trying to figure out is if we should take advantage of my husband's employer matching contributions for an RRSP. As it stands, we only have a $7,800 LIRA that was from a profit sharing plan from my husband's previous place of employment (we can't touch it; I wish we had some way to use it to pay off debt!). We did have about $4,600 in an RRSP, but used that for the Home Buyer's Plan to help purchase our house. So we have pretty much near nothing in retirement savings (my husband is 40). We have about $2,400 in a TFSA that we've been saving for an emergency fund ($50 a month). Our plan was to pay off the house has fast as possible once we get the loan paid off. It has been proving a real challenge.

My husband's employer is offering to match contributions, up to 2% of my husband's salary, up to a maximum of $1,800. So this means that if we contribute about $36 per paycheque, the employer will contribute $36 per paycheque. All in all, it's about $1,900 a year. About $950 a year of "free money." I was playing with the Canada Revenue paycheque calculator, and my husband would save about $10 in tax deductions per paycheque... so like $260 a year.

Is it even worth pursuing? I am seeing this RRSP deduction as another "bill," which would be almost $80 a month on average for us. I already have a post on how I achieved having a cell "bill" for $5 a month, so I'm trying to think as long term as possible and be thrifty. We don't have cable tv, have a reseller for internet, don't eat out, etc. It seems to me the $80 a month can be put to better use, such as paying off debt.

What do you all think? Am I overthinking all of this? According to Dave Ramsey's baby steps, we're still at step 2 and shouldn't even be thinking about saving for retirement right now.
19 replies
Deal Fanatic
May 22, 2003
6786 posts
3707 upvotes
Vancouver
If you're able to afford the small extra payments I would definitely take advantage of this.
[OP]
Member
May 24, 2014
202 posts
107 upvotes
Dartmouth, NS
notenoughsleep wrote: If you're able to afford the small extra payments I would definitely take advantage of this.
That's the issue. I have been telling myself that we really need to start putting aside $100 a month for buying another vehicle or two (we own a 2005 Corolla and 2005 Sienna that keep having to have the rocker panels and exhaust done every inspection) because at some point we have to retire those vehicles. And we're installing a wood stove (DIY) so we can try and save on our obscene electric bill (electric heat in Nova Scotia is ridiculously expensive), and holy expensive chimney pipe, Batman! Going to buy that tomorrow, and it's $595 (and that's getting a good deal at $86.29 per 36" chimney pipe by pitting Home Depot and Kent against each other with the price match of an already sale price. All in all, the used stove and all the new pipe and hearth will be nearly $1,700.

I use YNAB for budgeting, and I just don't see where another $80 a month is going to come from. I mean, I guess I can make it happen, but then it will make us pay off our debt slower, which, in the end, are we saving anything (ie, the "free money" from the employer) by all the interest we're paying with our debt (mortgage)?
Deal Addict
Jan 3, 2013
2353 posts
624 upvotes
Sidney
You 100% need to take advantage of this. It's 100% instant return, not even including the tax benefit. Even if you financed it with a credit card (don't), you'd STILL come out ahead.
Deal Addict
Sep 2, 2009
1714 posts
1463 upvotes
Ottawa
threehappypenguins wrote: My husband's employer is offering to match contributions, up to 2% of my husband's salary, up to a maximum of $1,800. So this means that if we contribute about $36 per paycheque, the employer will contribute $36 per paycheque. All in all, it's about $1,900 a year. About $950 a year of "free money." I was playing with the Canada Revenue paycheque calculator, and my husband would save about $10 in tax deductions per paycheque... so like $260 a year.
I can't speak to your financial situation. I will frame it another way: if I were to give you $2 every time you gave me $1, would you do it?

It is not so much a bill to pay as it is pre-paying for the future.
Deal Addict
Feb 26, 2017
2085 posts
2509 upvotes
Agreed join the plan. Its a 100% return on what you put in, which is something you won't get anywhere else. In contrast paying off your mortgage in extra installment mortgage is saving you 2.89% in interest.
Deal Addict
Sep 2, 2009
1714 posts
1463 upvotes
Ottawa
threehappypenguins wrote: [...]then it will make us pay off our debt slower, which, in the end, are we saving anything (ie, the "free money" from the employer) by all the interest we're paying with our debt (mortgage)?
The mortgage will be paid off slower, but the mortgage is likely <4%? The RRSP match is 100% instantly, and then a small return at tax time of the contribution (the overall value of the RRSP minus mortgage will be greater than just putting everything on the mortgage). This return can be used for the mortgage, debt, more RRSP, RESP, etc...
Deal Addict
Jan 3, 2013
2353 posts
624 upvotes
Sidney
Not picking on the OP at all... But this thread is so indicative of the lack of understanding (and education) of money. We are always taught "debt is bad, save save save" without a true knowledge of how money actually works (and can work for you). Even the tax savings ALONE is a higher return on investment than paying down the mortgage.

Add in 100% insta-return from the employer and threads like this shouldn't even really exist.
[OP]
Member
May 24, 2014
202 posts
107 upvotes
Dartmouth, NS
favelle75 wrote: Not picking on the OP at all... But this thread is so indicative of the lack of understanding (and education) of money. We are always taught "debt is bad, save save save" without a true knowledge of how money actually works (and can work for you). Even the tax savings ALONE is a higher return on investment than paying down the mortgage.

Add in 100% insta-return from the employer and threads like this shouldn't even really exist.
We're fairly low income, and there isn't much tax savings for us. That's why I'm asking here. I wasn't sure, because it's only about $36 a paycheque we'd be gaining from the employer, and I was having trouble doing the math to see if there is an advantage to not doing it.

Also, I'm getting nervous about when it comes time for another term for our mortgage. I'm afraid of our interest rates jumping way up high.
Member
Feb 29, 2008
324 posts
119 upvotes
GTA
one thing I miss working for the big banks is employee stock options. I always maxed those out.
you should definitely take advantage of this
Deal Addict
Jan 3, 2013
2353 posts
624 upvotes
Sidney
threehappypenguins wrote: We're fairly low income, and there isn't much tax savings for us. That's why I'm asking here. I wasn't sure, because it's only about $36 a paycheque we'd be gaining from the employer, and I was having trouble doing the math to see if there is an advantage to not doing it.

Also, I'm getting nervous about when it comes time for another term for our mortgage. I'm afraid of our interest rates jumping way up high.
Fair enough about the rates.. You're not alone on that worry.

Even if you're at only $20k per year income, the deductible from a $36/month RRSP contribution is greater than the savings from paying down your mortgage by an extra $36/month.
Jr. Member
Jun 17, 2018
122 posts
96 upvotes
Hamilton, Bermuda
threehappypenguins wrote: We're fairly low income, and there isn't much tax savings for us.
Even if the tax savings were nil (ie current marginal tax rate is same as forecasted marginal tax in retirement), contributing to RRSP for the match would still be a very good idea.
Deal Addict
Oct 4, 2009
2752 posts
1629 upvotes
Montreal
How much is the interest on your loan? As others have pointed out this is an immediate 100% return on that small sum of money off each paycheque.
Deal Expert
Aug 2, 2001
16890 posts
7181 upvotes
You cannot afford to skip out on this.

They are doubling your money, no investment is ever going to be as good as this.
Deal Fanatic
Jul 1, 2007
8504 posts
1638 upvotes
Any chance the employer offers this same matching plan in TFSA or non-registered form? It's not common, but some do, bigger companies anyway.

Then it would be easy to just do the contributions, get the match, then take your contributions out. Let the company matched portion grow.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Addict
Jun 14, 2018
1028 posts
1162 upvotes
threehappypenguins wrote: We're fairly low income, and there isn't much tax savings for us. That's why I'm asking here. I wasn't sure, because it's only about $36 a paycheque we'd be gaining from the employer, and I was having trouble doing the math to see if there is an advantage to not doing it.

Also, I'm getting nervous about when it comes time for another term for our mortgage. I'm afraid of our interest rates jumping way up high.
The math is nowhere near as complicated as you think it is and I'm shocked that neither you nor your husband can figure this out (no offense). Over a whole year, you could either make $950 with the employer contribution or make $30 (using 3%) by saving on the mortgage interest.
Sr. Member
Oct 1, 2003
527 posts
254 upvotes
Vancouver
I would definitely contribute. It is free money.

If you need it after you deposit, just take it out. You will pay taxes on that withdraw, but you'll be withdrawing double of what you put in. You will also lose that contribution room forever, but who maxes out their RRSP anyways.

Even better, if it can be put in a spousal RRSP. Then the withdraw will be income in the lower tax bracket. To sound fancy and smart, I think this is called Tax Arbitrage.

Of course this won't work if it is some kind of Locked in RRSP or there is some kinda of vesting period before you can make a withdraw. I think more often than not it is the case.
Deal Fanatic
Jul 1, 2007
8504 posts
1638 upvotes
doobievibes wrote: I would definitely contribute. It is free money.

If you need it after you deposit, just take it out. You will pay taxes on that withdraw, but you'll be withdrawing double of what you put in. You will also lose that contribution room forever, but who maxes out their RRSP anyways.

Even better, if it can be put in a spousal RRSP. Then the withdraw will be income in the lower tax bracket. To sound fancy and smart, I think this is called Tax Arbitrage.

Of course this won't work if it is some kind of Locked in RRSP or there is some kinda of vesting period before you can make a withdraw. I think more often than not it is the case.
Typically the employer portion can't be withdrawn until 2 years after it goes in. But yeah, worst comes to worst you can withdraw your own portion and pay the tax on it.

Still, it might actually be worth making some sacrifices in current spending in order to save for retirement. This amount that would be saved through the employer plan only represents a small fraction of what you shoudl be saving, if you're in your 40s and don't otherwise have much saved up yet (unless you plan to work until 70).
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Expert
User avatar
Apr 21, 2004
54685 posts
19492 upvotes
Does this matching go to a RRSP, which you can withdraw from or some locked in plan which you fan only touch after having reached a certain age?

I think there is a way to take out funds from locked in plans due to financial hardship and I will try to look it up later and share here.

Of course it only makes sense to use the funds to pay down debt since that fund was suppose to help one in retirement.

Edit:

Maybe your husband will be eligible to unlock that $7,800 in his LIRA, if need be (absolutely necessary to pay down debt and whatnot).
https://www.novascotia.ca/finance/en/ho ... s/faq.aspx
https://novascotia.ca/finance/PDFs/Form ... evised.pdf

For Ontario, we have this.
https://www.fsco.gov.on.ca/en/pensions/ ... forms.aspx

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