Segregated Funds (Individual Variable Insurance Contracts)
Segregated Funds (Seg Funds) are actually insurance contracts comprised of two parts - an investment portion to produce the return and an insurance policy to cover the risk.
Seg funds are like mutual funds in that you are pooling your money with other people to share investment gains by investing in a variety of investment products to correspond to different investment objectives ranging from capital preservation to speculative growth.
But, unlike mutual funds, Seg Funds are issued by insurance companies and include a guarantee that protects a percentage of the investor's principal from sudden market declines. The protected percentages are paid out at contract maturity or death of the contract owner. In this way, Seg Funds are an investment much like a mutual fund… with a safety net.
Other Seg Fund benefits include potential creditor protection, estate planning, disability waivers, tax advantages, and insurer insolvency protection.
Registered Retirement Savings Plans (RRSPs)
RRSP’s were introduced to allow people the opportunity to invest tax deductible contributions into retirement savings plans, providing tax relief to encourage savings to be converted into retirement income.
RRSP’s allows for tax deferred earnings and investment yields through income deferral, which enables the gross income to grow tax-free for the life of the investment without having the compounding effect diluted by taxation on the investment return. You get an immediate tax deduction against your personal income. All income and gains from your RRSP are taxed only when the plan is cashed or deregistered.
It is wise to invest in RRSP’s in your prime income-earning years (when you are in your highest tax bracket) and draw from them in your retirement (when you are in a lower tax bracket).
A payout annuity is a contract between you and a life insurance company whereby, in return for investing a sum of capital, the company provides you with a steady income for a fixed term or for the rest of your life.
Payout annuities are a popular alternative for registered retirement income funds (RRIFs), especially for people in their later years who no longer want to follow their portfolio. The insurance company invests the money and both a portion of your capital as well as the interest earned are returned to you.
Your income amount will depend on the amount you invest, interest rates at the time of purchase, your gender, life expectancy and your age at the time of purchase. There are many variations when purchasing annuities, including single-person annuities, joint annuities for couples, inflation indexed annuities and guarantees that beneficiaries will receive an inheritance if you die before exhausting the annuity.
Registered education savings plans (RESPs)
RESPs allow you to put money aside specifically for your child's education and are an attractive savings vehicle because of government grants made every year you contribute to the account. Both parents and grandparents can open an RESP.
Like an RRSP, an RESP is a tax-deferred savings tool, but only the tax on the earnings in the plan is deferred. The student will pay tax on the income when funds are withdrawn but students are usually assessed at a lower tax rate since they are low-to-no-income earners.
RESPs can be opened for children as soon as they are born, and contributions can continue for a maximum of 31 years (government grants will not be added after age 17). The lifetime contribution limit is $50,000. There is no longer any limit on the amount that can be contributed during a single calendar year, although grants may be stopped if a contribution is in
excess of RESP carry-over room from previous years of non-contribution.
Registered disability savings plans (RDSPs)
Registered disability savings plans (RDSP) are savings plans to help people save for the long term financial security of someone eligible for the disability tax credit.
Non-tax deductible RDSP contributions can be made until the end of the year of a beneficiary’s 59th birthday. Withdrawn contributions are not considered taxable income for the beneficiary when they are paid out of an RDSP. However, the Canada disability savings grant, the Canada disability savings bond, investment income earned in the plan, and rollover amounts are considered taxable income for the beneficiary when they are paid out of the RDSP.