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The investment includes stock, bonds, money market instruments and other assets.
The funds include assets from various industries and companies, as well as securities from different countries.
Depending on what kind of fund you will choose, it can be a more risky or less risky portfolio or a different portion of various types of assets (equities, fixed income, cash and cash equivalents, real estate, commodities, futures, and other financial derivatives). For example, a fund can hold 35% equities, 15% cash, 50% fixed income.
An investor will pay a fee (MERs) for managing their portfolio and incurred expenses.
However, investors can save money by not paying fees to buy individual stocks or bonds from each company and have diversification because it will come as a package.
Segregated Funds work the same way as mutual funds, are managed by professionals, and have diversification (mixed stocks, fixed income, and commodities in different industries and companies).
Additionally, such funds have protection from losing your investment.
How insurance works:
Segregated funds provide guarantee protection from 75%-100% of your investment on:
- Your death – guaranteed death benefits
- Maturity (when your money is locked for a certain period of time, most common period 10, 15 years) – the principal is guaranteed
You can buy funds through insurance companies or insurance brokers.
Similarly to mutual funds, segregated funds have fees (MERs) which are usually higher than those for mutual funds because they include insurance.
However, some insurance companies offer affordable and similar fees to the ones paid for mutual funds.
Segregated funds also have a unique feature, creditor protection.
If the investor dies, the money will go directly to their beneficiaries, and thereby there will be no probate fees.
The main purpose of this account is to get tax-free on investment income.
The main difference from RRSP is that you will be paying tax to be able to use the money, there is no tax-deferral.
However, there are no fees for withdrawal for the same reason as you already paid taxes on this money.
This product will help you to invest without paying any tax on the investment income. It is subject to a maximum contribution per year and overall limit.
To identify your contribution room, you can check your Notice of Assessment or read more on the Government website.
If you contribute to RRSP, it will reduce your taxable income. You can also keep investing your savings inside RRSP without any tax implications until you withdraw the money. If you decide to withdraw the money, it will add to your income and you will pay full taxes on this money.
RRSP is subject to a maximum amount based on your unused contribution room and earned income from previous years and some adjustments.
You can check your contribution room for RRSP in the Notice of Assessment and read more on the Government website.
There are two programs where you can use this money before the retirement without withholding tax Homer Buyers’ Plan and Lifelong Learning Plan.
Home Buyers’ Plan (HBP)
HBP allows you to withdraw the money to buy a home, however, you can only take advantage of this program if you are a first-time home buyer. You have to pay back within a 15-year period (start to pay in the second year after you withdraw, in the amount of 1/15 part of the total sum withdrawn). Besides, the maximum amount to withdraw is $ 35,000 for each spouse.
This is a really good option for many Canadians, especially for those who receive benefits as a group RRSP from their work (sometimes employers can contribute as well to group RRSP, typically matching your contribution), thereby you can save a down deposit much faster.
For more information on the Homer Buyers’ programs, visit Canada Revenue Agency website, and a handy guide that dive deeper into the Home Buying program.
Lifelong Learning Plan (LLP)
LLP lets you withdraw the money (up to $10,000 in a calendar year to a maximum of $20,000) for education for yourself or your spouse (common-law partner) and pay back within 10 years after you finish education.
For more information on the LLP program, please visit the Canada Revenue Agency website.
Spousal RRSP means you make a contribution for your spouse, and it will reduce your contribution room. This plan will also be eligible for HBP and LLP.
You also can check your contribution room for RRSP in the Notice of Assessment and on the Government website.
All contributions are made after tax deduction but contributors do not have to pay tax on the investment.
Some tax implications will be in place when the beneficiary (or contributor) withdraws this money, but typically if a student (beneficiary) uses this money for education and living expenses, they will be taxed at a lower rate.
The Canadian Education Savings Grant (CESG) allows to add to your contribution up to 20% and up to $2500 per year. Maximum lifetime grant per beneficiary is $7200.
RESP and CESG are also subject to other regulations and rules, to learn more, please check the Government website, and on the “Registered Education Savings Plan” page.
Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59.
Contributions that are withdrawn are not included as income to the beneficiary when they are paid out of an RDSP.
However, the Canada disability savings grant (grant), the Canada disability savings bond (bond), investment income earned in the plan, and the proceeds from rollovers are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP.
Read more about RDSP savings plan on the official Government of Canada website.