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 ๐Ÿ™‚

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



Filed under Finance, Random

27 responses to “Horror Story: Refusing RRSP Employee Matching aka Free Money

  1. It’s a sad story but unfortunately not an uncommon one.

    This is probably why my employer’s retirement plan is mandatory! haha

  2. When I heard about their 100% match, all I heard was “FREE MONEY!?” ๐Ÿ™‚

    I don’t refuse free money. That’s a 100% return on investment.

  3. Well,that guys sounds… funny. Interesting. Um, free money? Is always good!

  4. My employer offers an RRSP matching program, I put 3% in, they match 3%. I love it because it makes saving a no-brainer. All I have to do is show up for work and earn a paycheque. A coworker of mine constantly complained about the program and how the company was taking 3% of her pay – especially since she was so young and retirement was so far away…my head nearly exploded every time she brought it up.

  5. i’m not big on the whole RRSP thing but my company does match so i said “why not?” (id rather use my TFSA & other savings accounts so when i do need the money, i’m not dinged $500 for every $5000 of “income” i take out). But hey, if they’re giving it away, who am i to say no?!? like my favourite saying says: “Beggers can’t be choosy”.

    • There are definitely benefits to both RRSPs and TFSAs. The reason you are “dinged” when you take out money from RRSPs is because that money was not previously taxed, and now you need to pay taxes on them to uncle sam. The money that you have put into TFSAs is after tax money, that’s why it’s not taxed again.

  6. That’s is one crazy stupid money move. At least we are all smart enough not to make that one!!

  7. Sarah T.

    I have SO many co-workers that don’t do this. We have a matching program at work, and one co-worker said that she wouldn’t contribute because she doesn’t want to have her money sitting at TD Bank (we’re made to use TD Bank for our RRSP accounts here). I told her why not just do one at her bank, and one at TD with work to get the free money, and she said it would be too complicated…even though she only has two accounts at CIBC…

    • I have co-workers tell me all the time that it is too complicated to put money into RRSPs, and yet they never ask any questions or seem to even want to learn about it. Free money is good – (almost) no matter where it is! How is another account too difficult? I don’t get it….

  8. That guy is NUTS! So much free money, compounded over time…

    My employer matches a certain percentage of our income for our pension plan, but not the RRSP, which is disappointing. That’s definitely going to be a perk I look for in my next job.

  9. *facepalm*
    Whhhhyyyyyyyyy do people do that to themselves????
    *shakes head*

    Right now I’m following your train of thought. I’m contributing to get the max employer contribution, then I have e-Series funds on the side that I put my unmatched money in.

  10. Good post. I didn’t use my company match for RRSP’s one year because I missed the deadline… boo. I am definitely going to be more organized at my new job. I also wanted to mention I nominated you for a Liebster Blog award..http://www.asiaandbam.blogspot.com.au/2012/02/award-for-me.html

  11. Ahh I hope you win the giveaway then.. maybe there might be a tip or two you learn from the software that you can impart on your dad perhaps?

    Though I doubt it- your dad sounds like a tax machine!

  12. Paul

    What I want to know is where anyone is getting 5% interest at… I can’t find any safe place to invest in that yields even half of that. The best I can find is a 5 year GIC at 2.35% but that locks your funds out for quite a while and only matures at the end so there’s no interest compounding effect.

    The only way I see is to invest in stocks or mutual funds, which are extremely volatile and risky. I don’t understand the casual manner to which a 5% interest rate is tossed out in a blog post.

    • It’s an average return over long term investments, and 5% is actually very conservative.

      I invest my money in a mixture of bonds and stocks, and my overall rate of return for the past 5 years is around 8%. Some years, it’s higher, other years, it’s lower, so I am fairly comfortable using 5% for my assumption. If you portfolio is 100% in GICs and the current interests rates being as low as they are, then a 5% return would not be an assumption you’d use. It all depends on what is in your portfolio, and your level of risk.

  13. HB

    I worked at this company for the last 2 years or so, I never really took the RRSP matching seriously because I didn’t think I would work here for so long. But if you look at it differently you are receiving 100% of the return right away, even though you might have to give up 3% every paycheque.

    It’s not even that I needed the money. I couldn’t wrap my head around it at the time. And now I basically gave away $3000. Lesson learned though.

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