Should I Use Segregated Funds In My RRIF?
What Are Segregated Funds?
Segregated funds (segfunds) are basically mutual funds with an insurance benefit added to help protect the capital. In other words, a mutual fund with an insurance wrapper. They are variable insurance contracts which often offer certain guarantees.
The insurance fund wrap help protect the capital you invest from loss. The proportion of your segregated fund protected varies from 75% to 100% but it is necessary to lock in your money for various periods, up to 10 or 15 years. The investment matures at a fixed time or at your death.
Who Sells Segregated Funds?
As they are an insurance product, segregated funds are sold only by brokers who have an insurance licence. The brokers will also explain to you the 3 major benefits of paying the higher segregated fund fees.
The first major benefit is protection if you become bankrupt.
If you have named a beneficiary in your non registered segregated fund policy, the proceeds are protected from seizure by your creditors. So if you believe you may be facing this problem, you need to check that the beneficiary on your policy reads “John or Jane Doe” and not your estate.
The second major benefit is that if you have a named beneficiary in your non registered segregated fund, the estate proceeds will be paid to that beneficiary directly. In other words, it is not necessary for these monies to go through probate. Probate is sometimes a long and costly procedure, so avoidance leaves your beneficiaries less stressed.
Segregated Fund Fees
As with mutual funds, there are fees if you decide to cancel your segregated fund. You have paid a higher fee to start with as the insurance cost needs to be covered. Accordingly you should consider carefully whether a segregated fund is for you.
One final benefit of a segregated fund is that mostly all of them have a reset option.
A reset option allows you to lock in any gain you have made. Let’s say you have invested $20,000 and after a year or so is now worth $22,000. At that point you can rest the minimum you will be returned at maturity to $22,000. Now you have protected your capital and you gain, even though it extends the period of your guarantee.
Whatever you decide about your RRIF, segregated funds could play an important role.
Segregated funds come with maturity dates. You must hold your contracts until the specified maturity date is reached. Once your contract matures, you will receive the return of your capital and gains.
You can make the best of this factor by choosing a maturity date that works for you. You have some leeway to choose how long you want to invest in a segregated fund. You can then also choose a payout schedule you find in most suitable. An early withdrawal will incur fees.
Summary Benefits and Drawbacks
|Advantages: Segregated Funds in a RRIF||Disadvantages: Segregated Funds in a RRIF|
Should I Consider Adding Segregated Funds To My RRIF?
You should consider investing in segregated funds in your RRIF. If you have the risk appetite for them, segregated funds can produce great tax-free returns inside your RRIF. You can also shop around for the funds with the best guarantees so you can rest assured you have little to lose.
What to do now?
- We supply you with the best Segregated Funds and other eligible investments in Canada as our brokers represent all the best financial institutions in Canada. For personal assistance on your Segregated Funds please use our Segregated Fund Form.