Understanding the Tax Implications of Contributing to Your Group Account

When you sign up for a Wealthsimple Group Plan through your employer, you may have a few different account options to save for your future. If your employer offers a match on your contributions, that’s an extra boost to your savings! 

Depending on the type of account, your contributions and employer matches may come with tax implications. In this article, we break down the tax implications of the different group account types you might have access to.

Types of Accounts and How They’re Funded

1. Group RRSP (Registered Retirement Savings Plan)
   • Contributions are added directly from your paycheque before taxes are taken out.
   • Employer matches are also contributed pre-tax, and are not taxed.
2. Group FHSA (First Home Savings Account)
   • Like the Group RRSP, contributions are made from your paycheque before taxes.
   • Employer matches are also made pre-tax.
3. Group TFSA (Tax-Free Savings Account)
   • Contributions are made using post-tax dollars, meaning taxes are already taken out of your paycheque before the contribution is made.
   • Employer matches are considered taxable income, so you’ll pay income tax on the match in the year it’s added to your account.
4. Group Non-Registered Account
   • Your contributions and employer matches both use post-tax dollars.
   • Employer matches are taxed as additional income.

What Does This Mean for Your Paycheque?

• Pre-Tax Contributions (Group RRSP, Group FHSA):
  These reduce your taxable income today. Employer matches are added to your account without affecting your taxable income for the year.
• Post-Tax Contributions (Group TFSA, Group Non-Registered):
  These don’t reduce your taxable income now, and employer matches are taxed as additional income in the year they are paid out.

Example

Imagine you earn $5,000 per month before taxes, and your employer matches your contributions dollar-for-dollar up to $500. Your tax rate is 20%. Here’s what happens when you contribute $500 to a Group RRSP (pre-tax) versus a Group TFSA (post-tax).

Pre-Tax Contribution (Group RRSP):

• Your taxable income is reduced: $5,000 - $500 = $4,500.
• Employer adds a $500 match directly to your Group RRSP.
• Taxes are calculated on $4,500:
  $4,500 × 20% = $900 in taxes.
• Take-home pay: $4,500 - $900 tax sent to CRA = $3,600.
• Total savings: $1,000 ($500 contribution + $500 employer match).

Post-Tax Contribution (Group TFSA):

• Your full salary is taxed first: $5,000 × 20% = $1,000 in taxes.
• After taxes, your take-home pay is: $5,000 - $1,000 = $4,000.
• You contribute $500 to your TFSA: $4,000 - $500 = $3,500.
• Employer match ($500) is considered taxable income:
  $500 × 20% = $100 in taxes.
• After tax on the employer match, your take-home pay is reduced by another $100: $3,500 - $100 = $3,400.
• Total savings: $900 ($500 contribution + $500 employer match - $100 tax).*

*You’ll still see $1,000 contributed to your Group TFSA. The additional taxes on your employer’s match will be deducted from your take-home pay.

Key Takeaways

• Pre-tax accounts (Group RRSP, Group FHSA) reduce your taxable income today, so you keep more of your take-home pay. 
• Post-tax accounts (Group TFSA, Non-Registered) don’t lower your taxable income now, and employer matches are taxed as additional income in the year they’re paid. While this slightly reduces how much you can contribute, the match still adds significant value to your savings.