Group Annuity vs. Registered Retirement Plan
Both a group annuity and Registered Retirement Savings Plan are employer-sponsored retirement programs that help employees save toward retirement. While there are many similarities between the two programs, there are also significant differences between them.
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Definitions
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Group annuities are tax-deferred annuities offered by employers to employees; that is considered a Defined Contribution Pension Plan. A Registered Retirement Savings Plan (RRSP) is a Canadian retirement plan established by an employer as a legal trust. Both types of plans allow investors to save toward retirement and invest in a variety of securities investments, deferring taxes until distributions are taken.
Contribution Considerations
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Both employers and employees are allowed to make contributions in either a group annuity or an RRSP. Employees are given the option to elect salary reductions. Employers are required to contribute at least 1 percent of the employee's income in a group annuity that is considered to be a defined pension plan. The RRSP structure allows a maximum of 18 percent, up to $18,000 of annual income, to be contributed by employees. A group annuity allows 100 percent of income to be contributed, not to exceed $21,000 annually based on 2010 limits.
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Tax Implications
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Employee contributions into either of the plans allows the assets to grow tax-deferred. Employees are allowed to take distributions after age 59 1/2 and add the contributions to income. In a group annuity, the employer's contributions are not added to the income of the employee; they are in an RRSP. So while the assets placed in the account are deductible, the RRSP participant may earn more than he actually did.
Distribution Rules
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All money in an RRSP is immediately vested, where money in a group annuity may require a minimum of a 2-year employment record to retain employer contributions. In a group annuity, there may be a lock on distributions while you are employed for funds that were required distributions. Elective distributions can be withdrawn from either plan at any time. The RRSP requires that employees take distributions starting no later than age 69.
Eligibility Requirements
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Those employed with companies offering an RRSP are immediately eligible for plan enrollment. The program is 100 percent voluntary and open to all employees including officers and shareholders. The group annuity plan may be defined by the employer, possibly requiring up to 2 years of service prior to enrollment eligibility. The employer may elect immediate enrollment, also. The plan may also be defined as voluntary or nonelective and is open to owners and shareholders as well as part-time employees meeting income requirements.
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