INVESTMENT | Financial Solutions

Segregated fund in Canada: What
you need to know

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What is a segregated fund?

Segregated fund contracts are a popular investment option, available only from life insurance companies. Similar to mutual funds, segregated funds are large pools of money invested in stocks, bonds or other securities. These contracts have higher fees than mutual funds because they also offer guarantees and some of the additional benefits of a life insurance contract.

Benefits of segregated fund:

1. Guarantees. Protect the value of the premiums you paid on the contract maturity date and on death. The guarantees are 75% to 100% of your premiums (reduced for any withdrawals). Some segregated fund contracts also offer income guarantees.

2. Beneficiaries. You can name a beneficiary to receive a death benefit from your registered or non-registered accounts. Your beneficiary will receive the death benefit when you die. The death benefit is the contract value at death, or the guaranteed amount, whichever is higher. The death benefit bypasses your estate and goes directly to them. You can also control how your beneficiary gets the benefit: as a lump sum or in the form of a payout annuity.

3. Potential creditor protection. This means that creditors may not be able to take the funds you have in your segregated fund contract.

4. Guaranteed income options. Some segregated fund contracts offer lifetime guaranteed income. This can help provide you with a guaranteed income for life.

Do segregated funds pay dividends?

Similar to mutual funds, segregated funds and mutual funds can earn interest, dividends, capital gains (or losses), and foreign income. A mutual fund distributes these amounts to the investor in the fund. In almost all cases, these amounts are immediately reinvested back into the fund to buy more units. In contrast, with a segregated fund, these amounts remain in the fund. They increase the value of the investment without increasing the number of units the investor owns. Connect with an advisor for more detailed information.

Do segregated funds offer creditor protection?

Segregated fund contracts are potentially protected from the claims of some creditors in the event of bankruptcy and legal proceedings. Creditor protection depends on court decisions and applicable legislation, which can change. It can also vary from province to province. Keep in mind, creditor protection can never be guaranteed. Talk to a lawyer to find out more about the potential for creditor protection.

When can I withdraw from a segregated fund?

You can request withdrawals from a segregated fund contract at any time depending on the registration type. Any withdrawals you take will reduce the guarantees on the contract. Some withdrawals may be subject to early withdrawal charges. Withholding tax may also apply in some cases, and some or all of the withdrawal may be taxable. See your contract for more details or connect with an advisor for more information.

What’s the difference between a mutual fund and a segregated fund?

The main difference between a mutual fund and a segregated fund contract is that a segregated fund contract includes insurance benefits that can help protect your investment. Segregated fund contracts guarantee 75% to 100% of your premiums being returned (reduced for any withdrawals) when you die or when the contract matures. Mutual funds don’t offer this benefit.

Do segregated fund contracts have higher fees than mutual funds?

In general, segregated funds have higher fees than mutual funds due to the guarantees. However, fees will vary depending on the funds, and products you choose. Connect with an advisor for more information.

Can a segregated fund contract be held in an RRSP?

Yes, segregated funds can be held in your registered retirement savings plan (RRSP).

Can a segregated fund contract be held in an TFSA?

Yes, segregated funds can be held in your tax-free savings account (TFSA).

What happens to a segregated fund contract after death?

When the annuitant on the segregated fund contract dies, the death benefit is paid to the beneficiary named on the contract. The proceeds can be paid in different ways, either through:

lump-sum payments or
our legacy settlement option, which lets you make customized decisions for your beneficiaries.

The legacy settlement option can help address complex family dynamics, allowing you to maintain some control over your assets after death. For example, perhaps there’s a beneficiary or dependent who’s not responsible with money. In this case, you can set up a monthly payment plan that lasts for their life or a specific time period.

Another benefit to segregated fund contracts is privacy. If you have a named beneficiary, the distribution of money to that beneficiary will be private. However, that may not be the case with your will. Your will won’t govern how the money of a segregated fund is distributed, unless your estate is the beneficiary. Usually, if a will has been probated anyone can see a copy of that will at the court office where it was probated. Connect with an advisor for more detailed information.

What is the difference between a TFSA and an RRSP?

Key takeaways

RRSPs are used mostly to save for retirement, but you can withdraw money for your education or to buy your first home
TFSAs are mostly used to save for mid and short-term goals like a vacation or vehicle
There are some common misconceptions about RRSPs and TFSAs
There are things to consider when choosing between an RRSP and a TFSA

What’s in this article?

What’s an RRSP?

A registered retirement savings plan (RRSP) is an investing and retirement savings account registered with the Canada Revenue Agency (CRA) that provides Canadians benefits to save for retirement.

Here’s how you can benefit from an RRSP:

Your RRSP contributions may be deducted from your income resulting in a lower taxable income.
You don’t pay tax on the income earned in an RRSP.
Once you retire and receive payments from a registered retirement income fund (RRIF) or annuity, your marginal tax rate may be lower because your earned income may be less at that time.
You or your spouse/common-law partner can contribute to your RRSP.

What’s a TFSA?

A tax-free savings account (TFSA) isn’t a typical savings account. It’s versatile, so you can use it to save for a more immediate goal, like saving for a new car or a trip, but you can also use it to save for your retirement.

Here’s how you can benefit from a TFSA:

You don’t pay tax on any Income earned in a TFSA or on money you withdraw.
There’s no contribution deadline, which means you can contribute to a TFSA at any time. Any unused contribution room is carried forward on January 1 each year.
If you withdraw money from a TFSA, you can recontribute it to your account (but you must wait until after Jan. 1 of the following year to do so).
You can put your TFSA funds towards many large expenses, including academic courses, a down payment on a home and retirement expenses.
Your spouse can give you money to contribute to a TFSA without attribution of income.

Do you need a TFSA or an RRSP?

At the end of the day a TFSA and an RRSP both help you do the same thing – allow you to save money for the future. But they do it in different ways, so depending on your circumstances, having both can help you achieve your goals.

Common misconceptions about RRSPs and TFSAs

RRSPs are pointless if you have to pay tax once retired

Not necessarily. As you build your savings in an RRSP, you don’t pay taxes on that growth until it’s withdrawn. So, by the time you start withdrawing a steady amount from your RRSP, you’ll be retired and may no longer be receiving an income. That means your tax rates may be lower on withdrawals, so the money that you’ve saved for years in an RRSP can still help you live out your dream retirement.

Plus, each year you contribute to your RRSP, you can claim an income tax deduction for the amount you’ve contributed. So, while you’ll pay tax on withdrawals during retirement, you can save on your taxes in the years you contribute.

RRSPs are only for retirement

The money that you invest in an RRSP can go towards more than your retirement. Here are some other big life events that you can put your RRSP funds towards:

Financing a home: You can borrow money from your RRSP for a down payment on your first home under the government’s Home Buyers’ Plan. You don’t have to pay tax on this money, so long as you pay it back within 15 years after it’s withdrawn.
Saving for an education: You can borrow money from your RRSP to pay for full-time education or training for yourself or your spouse under the government’s Lifelong Learning Plan. You don’t have to pay tax on this money, so long as you pay it back over a period of 10 years.

You should only put money in an RRSP right before the annual deadline

Every year, the deadline to contribute to your RRSP is in the first 60 days of the year. However, you can contribute up to the maximum amount at any point throughout the year, which can help you save at a steady rate. If contributed early in the year, you can get the benefit of compound interest that will be reinvested – the money grows for almost a full additional year.

If you contribute any funds after the March 1 deadline, those contributions will result in a tax receipt for the following year. For example, if you contribute on April 1, 2023, those contributions will be on your 2023 tax receipt. However, if you contribute on February 1, 2023, (or any time before March 1, 2023), your contributions will result in a 2022 tax receipt.

How to choose between an RRSP or TFSA

Many investors will end up investing in both RRSPs and TFSAs. However, here are some things to consider about when to invest in each.

Income

Generally, if you make more than $50,000, you should invest in RRSPs because the money creates a tax deduction that helps reduce the income tax you’ll pay. If you make less than $50,000, the RRSP tax deduction is less important because after claiming basic tax deduction, you probably won’t be paying much income tax. Therefore, you should invest in TFSAs.
When you’ll use the money

RRSPs are for retirement, a long-term goal. TFSAs can be for retirement as well, but are also used for short and medium-term goals such as a vacation, vehicle or emergency fund.
You have a group plan

If you receive a matching contribution from your employer for a group RRSP, then you should try and maximize that if you can.
You’re buying your first home or funding your education

Contribute to an RRSP due to the availability of the Home Buyers’ Plan and the Lifelong Learning Plan.
Your marginal tax rate when you expect to use the money

You should consider RRSP contributions when your current marginal tax rate is higher than when you’ll use the savings as income (retirement). You should contribute to a TFSA when your marginal tax rate is lower than when you expect to use the money.

What’s next?

Now that you know more about the Segregated Funds, RRSPs and TFSAs, why not meet with your advisor at

Financial Solutions

Speak with an advisor who can help you navigate mutual funds and segregated funds.
Look into how these funds can fit into your estate planning.

Create a plan to save for retirement
Determine how RRSPs and TFSAs can help you achieve your savings goals

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