Daily Archives: February 15, 2012

Horror Story: Refusing RRSP Employee Matching aka Free Money

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My Dad

One of the most outrageous stories, I’ve heard was from my dad. Even though my dad is an immigrant and English is not his first language, boy, can he navigate his way around tax documents well.

When it comes to filing for personal income taxes, I bet that my dad knows more than the average Canadian. In fact, my dad is the go-to-tax man in my family and his circle of friends.

I say this with a lot of pride because if it wasn’t for my dad, I might not be as interested as I am in personal finance and how taxes relate to me (I started filing my personal income taxes in high school).

I love having our debates discussions about the merits of Registered Retirement Savings Plans (RRSPs) versus Tax Free Savings Accounts (TFSAs). We don’t always agree, but I always learn something new.

Funny Story

My dad told me a story of how his co-workers and him were discussing RRSP during lunch one day. My dad’s employer had a RRSP company match program where they would match their employees’ contributions up to 6% of their annual salary.

His co-worker contributed to his RRSPs (outside of the company plan) so that he could receive his annual tax refund. But my dad’s co-worker refused to put money into the company RRSP matching program because the way he saw it, he wouldn’t get a tax refund on the money the company is matching.

So let me get this straight…

At this point, I wasn’t even sure if I understood my dad’s co-worker’s train of thoughts.

Instead of seeing the 100% free money that company is giving to him to put into his RRSP, all he sees is that he doesn’t get a tax refund on the free money the company is giving him.

That’s right, buddy. You cannot get a tax refund on FREE MONEY.

So, his co-worker refused to contribute to the company match plan, and has never contributed to the company plan for the entire 15-20 years he has been working at the company.

Refusing ~$80,000 of Free Money

Let’s assume his annual salary was $40,000 for simplicity sake. That’s $2,400 annually of free money he is missing out on. Compound that over 20 years at 5% interest rate and he’s missed out on $79,440 of free money. And that’s assuming no salary increases over the 20 years.

All because he wanted to get a tax refund. On free money.

My dad tried to explain to him the logic that he cannot get a tax refund on employer contribution, but he is missing out on a 100% return but simply refusing the match. It fell on deaf ears.

The Lesson

I’m sure I’m preaching to the choir, but when one refuses to participate in a company matching program, you are loosing out on free money. Even if your contribution doesn’t increase in value – you are already getting a 100% return on the money you put in – from your employer.

Right now, most of my RRSP contributions go to my employer plan since I like to get my tax savings right away (money going directly to my RRSP plan is not taxed in my paycheck). But since the TD e-series funds offer better rates, I will contribute only the amount my company will match into my employer’s RRSP plan, and direct the remainder of my contributions to my e-series fund.

This way, I get my free money and lower fees 🙂

Readers, do you have any RRSP horror stories to share? Does your company have RRSP matching program?

Cheers,

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