RRSP/RRIF/Annuities

A Registered Retirement Savings Plan (RRSP) is a savings and investment account registered with the Canadian government, which provides for tax deferral whereby contributions can reduce your tax now to grow your investment to fund retirement.  When funds are withdrawn in the future, they do become taxable.
 
Investments made under contract with a life insurance company have benefits not recognized by other financial institutions.  As an example, where there is a named beneficiary funds may be protected from creditors.  Also, with a named beneficiary, upon death the funds generally would not pass through the Estate and therefore not be subject to probate fees, since the beneficiary designation with a life insurance company supersedes the Will.
 
Segregated funds unlike mutual funds provide maturity and death benefit guarantees.  You do pay an additional fee for this insurance protection and you do have to hold your investment for a certain length of time (usually 10 years) to benefit.  Investments can be setup on a Registered or Non-Registered Account basis.

Segregated Funds – are a pool of investments kept separate or segregated from the general assets of the life insurance company.  When your premium is allocated to the Funds, Units are allocated to your Policy. Segregated funds are individual insurance contracts that invest in one or more underlying assets using a mix of investments such as stocks and bonds. A professional manager chooses investments that match the Funds goals for risk and return.  You can redeem your fund units at any time.

3 Advantages of Segregated Funds

1. Principal guaranteed – Depending on the contract, 75% to 100% of your principal investment is guaranteed if you hold your fund for a certain length of time (usually 10 years). If the fund value rises, some segregated funds also let you “reset” the guaranteed amount to this higher value – but this will also reset the length of time that you must hold the fund (usually 10 years from date of reset).
2. Guaranteed death benefit – Depending on the contract, your beneficiaries will receive 75% to 100% of your contributions tax free when you die. This amount is not subject to probate fees if your beneficiaries are named in the contract.
3. Potential creditor protection - This is a key feature for business owners in particular.

3 Disadvantages of Segregated Funds

1. 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. If you cash out before that, you’ll get the current market value of your investment, which may be more or less than what you originally invested. You may also be charged a penalty.
2. Higher fees – Segregated funds usually have higher management expense ratios than mutual funds to cover the cost of the insurance features.
3. Penalties for early withdrawals – You may have to pay a penalty if you cash out your investment before the maturity date.

While a RRSP is a retirement savings vehicle, when you are ready to start receiving income from your RRSP account, you can convert to a RRIF or purchase an annuity from a life insurance company, unless you choose to cash out your RRSP completely and add the full market value to your income for the year, paying tax on the full amount, which is not a great option.
 
If you are interested in discussing your investment options, please give C. M. Steele Insurance Brokers a call at 905-835-2417 or email.