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The Benefits of Segregated Funds for Older Investors

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For older investors, segregated funds provide the benefits of a low-risk option with good returns.

What are segregated funds?

Sold by Canadian insurance funds and advisors, segregated funds are a type of investment vehicle that allows your money to grow, while providing certain guarantees such as reimbursement of capital upon death. Put simply, segregated funds offer you the growth potential of a mutual fund with the guarantees of life insurance.

While those interested in avoiding market risks used to focus on GICs and short term bonds, particular segregrated funds now allow older Canadians the full ability to take advantage of the upside of investments with protection against losses!

Advantages of Segregated Funds

a) If you are under the age of 70 as a new investor, most segregated funds guarantee 75% or 100% of your principal investment over 10 years OR when an investor dies, as long as you are under the age 0f 70. For older investors, Empire Life, a large Canadian insurance company, now has a great segregated fund offer with 100% guarantee for all clients who are under 80. This 100% death guarantee has some real value if you are 70+. This benefit becomes very valuable for an individual who is not in great health (there is no physical health check required). This ability for an older investor to still have a 100% death benefit guarantee is crucial to this opportunity as it means that the guarantee might kick in over a much shorter period than the traditional 10 years.

b) Because it is considered an insurance product, the proceeds (on death) for non-registered money will pass directly to your beneficiaries’ tax free and without probate.Segregated-Funds-Benefits

c) Segregated funds are not only offered as Balanced or Income funds. Traditional “higher risk, higher reward” asset class funds are also available. For example, Empire Life’s Elite Equity Fund has an annualized return of 10% going back to 1969.

d) Unlike mutual funds, the segregated funds can be reset up to twice a year. If the value of your funds increase, you get to lock in a higher floor value.

e) As an example, Empire Life only charge fees in the 2.5% to 2.75% range. While this would seem high in comparison to an ETF or index fund, the principal guarantees, reset features, and avoidance of probate fees make this investment significantly more valuable for older investors.

If this article was of interest to you, read about why an age-based investing strategy might not be right for you!

The RSP: Minimize Your Biggest Future Tax Bill

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In the future, your biggest tax bill will be your RSP taxes.

We all know of the benefits of tax refunds and tax-free growth for RSP, but what happens after you retire?

Here is how the RSP taxation works:

• Your RSP grows tax-sheltered until you draw out money. Any money you withdraw each year is considered “yearly taxable income” for tax purposes.

•If you wait to withdraw your money, the year you turn 72, your RSP turns into an RIF, which means that the government mandates you must withdraw at least 7.48% each year and pay tax on it. If you are married and you pass away, the RSP/RIF will simply transfer over to your spouse.

• The year the surviving spouse passes away, the entire value of the RSP/RIF is considered one year’s taxable income. If you have a $500,000 RIF left at that point, the government will take $212,000 in taxes!! This is often shocking to the estate.

A few tips to help you avoid your biggest future tax bill

How do you avoid this huge tax hit?

1. Don’t save so much in your RSP in the first place. Unless you are in the top tax bracket (and enjoying the maximum RSP refunds), saving too much now can lead to a massive tax hit at the end. In low income years, put less or nothing into your RSP.

2. Draw more money out while you are alive to enjoy it. From a pure financial perspective, you want to draw out registered money in years when it can be done at a lower tax rate – those years when you have very little other income. From a philosophical point of view, you want to draw out the funds when you are still able to enjoy it.

3. You can use strategies like the RSP meltdown to effectively draw out more money from your RSP by creating a tax deduction equal to the amount withdrawn. This strategy can be quite effective for many people, but does require some leveraged investing, and you might require professional advice.

The main message here is that you need to have a long-term tax minimization strategy, instead of simply saving up RSP funds.

One quick and free tool is the The Tridelta Retirement 100, which helps you see your likelihood of running out of money, your likely estate size and lifetime tax bill. By playing with RSP numbers, you can see the impact yourself.

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