Did you know, Segregated Funds are similar to mutual funds. What sets them apart are the guarantees they offer which protects the principle you’ve invested against possible market downturns. Distributed exclusively by insurance companies, segregated funds are comprised of stocks, bonds or market securities, and are managed by experts.
Advantages of Segregated Funds:
- Principal guaranteed – Depending on the contract 75% to 100% of your principal investment is guaranteed
- Guaranteed death benefit – Depending on the contract, your beneficiaries will receive 75% to 100% of your contributions tax free when you die.
- Creditor Protection. This asset is non-seizable
Disadvantages of Segregated Funds:
- Your money is locked in – You have to keep your money in the fund until the maturity date (usually 10 years) to get the guarantee.
- Slightly higher fees – Remember, portion of your principle is guaranteed/protected from market downturns
- Penalties for early withdrawals – You may have to pay a penalty if you cash out your investment before the maturity date.
Tax-Free Savings Account – TFSA
Tax-free savings accounts (TFSAs) are designed to help Canadians save more. In addition to cash, you can have GICs, bonds, stocks, mutual funds, ETFs and many other products in your TFSA. The annual TFSA dollar limit in 2019 is $6,000. Also, you can carry forward any unused contribution room. Funds withdrawn from your TFSA are tax-free. This can include your original contribution amount as well as interest, dividends and capital gains generated from the investments.
TFSA contributions are made with after-tax dollars but RRSP contributions are made with pre-tax dollars. You’ll need to consider your financial circumstance, including your income tax rate today and what you think your tax rate could be in the future, when you need the funds.
Registered Retirement Savings Plan – RRSP
A Registered Retirement Savings Plan (RRSP) is an account, registered with the federal government, that you use to save for retirement.
Tax-deductible contributions: You get immediate tax relief by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars
Tax-sheltered earnings: The money you make in your RRSP investments are not taxed as long as it’s in the plan
Tax deferral: You’ll pay tax on your RRSP savings once you withdraw money from your plan
RESP – Registered Education Savings Plan