Seg Funds Worth Your Consideration

Q. As a retired person concerned about preservation of retirement savings, I am wondering if “seg funds” are an appropriate investment to get both diversification and security? – Bob H.

A. Segregated funds are pooled funds similar to mutual funds with an insurance feature. Segregated funds offer a guaranteed return of principal after a specific holding period, usually 10 years, or a death benefit guarantee of the principal or the current market value, whichever is greater. The guarantee comes with a cost in the form of a higher management expense (MER). This is offset by the peace of mind that comes with the guarantee; it is a mechanism for an individual who would normally not qualify for insurance to obtain an insured investment. Finally, seg funds may provide creditor protection, especially helpful to business owners and entrepreneurs.

Q. I was recently downsized from my job and face a period of unemployment. I will have about $40,000 after-tax from the sale of a capital asset and I’m wondering if I should use some of these funds to make an RRSP contribution or invest these funds in a secure investment in case I need them to support my lifestyle while I am unemployed? – Jennifer M.

A. It is important for you to have access to some of your cash reserves while you are unemployed, especially as you don’t know how long it will last and you may incur additional expenses throughout the year ahead. However, there are advantages to making even a small RRSP contribution. You may owe additional taxes if you received a severance benefit, and may be required to make a homebuyers or lifelong learning plan repayment so as not to have the withdrawal considered taxable income. Lastly, by making an RRSP contribution, you may obtain a tax refund which could be used to support your lifestyle. It would be advisable to consult with a professional accountant to get advice specific to your situation and to determine an appropriate contribution amount to maximize your benefit without investing all of your cash reserves.

Q. I am confused about how an RRSP contribution affects my tax bracket. – Sunny S.

A. Saving for retirement in a RRSP is one of the few tax breaks available to employed Canadians. The government allows us to contribute up to 18% of the previous year’s income (less pension adjustment if applicable and up to the prescribed maximum contribution amount set each year). The impact of the contribution to an RRSP is to lower one’s taxable income and hence the amount of income tax payable. As a Canadian taxpayer, you have the choice of paying the income taxes or saving for your retirement! The choice is obvious and it is the reason it’s so important for individuals to take advantage of this government-supported opportunity. Maximize your RRSP contribution each year and benefit from the chance to grow your RRSP savings in a tax-sheltered RRSP account.

Bev Moir is a financial planner with The Moir Team at ScotiaMcLeod in Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member CIPF.

This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.