Should I Use Segregated Funds In My TFSA?

segregated funds tfsa
Segregated Funds in TFSAs

Segregated Funds in a TFSA

TFSAs allow you to save on income and capital gains taxes incurred through a range of investments. A TFSA also allows Canadians to shelter themselves from the taxes on income through insurance contracts.

Before you go ahead and invest in segregated funds using a TFSA, consider both the benefits and drawbacks of doing so. But first, you might be wondering what exactly segregated funds are.

What Are Segregated Funds?

Segregated funds, as the name implies, are funds that are segregated from the main investment funds of Canadian insurance companies. These funds are used to allow investors to invest in insurance products. The companies use them to manage variable annuity insurance products.

Segregated funds are often compared to mutual funds. They are both investment vehicles containing actual assets. In the case of segregated funds, the investor is investing primarily in individual, variable insurance contracts.

You can only buy into segregated funds directly through Canadian insurance companies. You will not be able to find them publicly listed on exchanges. Likewise, you must remember that you’re not buying shares in the insurance company. Buying contracts is thus very different from investing in the company itself, and you can’t approach these investments the same way.

As an investor, you can benefit from the fact that insurance contracts appreciate. In addition, they also come with very strong guarantees compared to other investments because they are legally recognized as insurance products, not securities.

Insurance Contracts As Investments

The investments you need to pay attention to in a segregated fund are the assets your contract holds. Those are the assets that will allow your contract to appreciate over time.

You must also read over the guarantees the insurance company offers with your contract. They are normally guaranteed for at least 75% of your principal investment.

Benefits Of Segregated Funds In An TFSA

Pool Investments

Segregated funds are the result of a pool of money from many different investors. So, you are one of many investors that increase the total value of the segregated fund.

The protections afforded to segregated funds, alongside the fact they are pooled together like mutual funds, make them a strong long-term investment option.

Guarantees & Protections

Your contract is guaranteed for between 50% and 100% of your premiums as of the maturity date. In some cases, you can also get a guarantee for income.

These protections make segregated funds a great option for high-risk professionals. Contracts are protected against seizures from creditors during bankruptcy and other financial hardships. Business owners and the self-employed should pay special attention to these protections.

Beneficiaries

Insurance products carry the benefit of making it easy to add beneficiaries. So, the death benefit for the segregated fund will bypass your estate and land directly in your beneficiary’s hands.

Drawbacks Of Segregated Funds In A TFSA

Risk

Investments come with risks, and segregated funds are no different. There’s a reason why insurance companies guarantee between 50% and 100% of your principal investment. Segregated funds are considered insurance products. The bodies that govern and oversee their use are the same ones that cover insurance companies and their policies.

You can reduce the risk associated with segregated funds by only investing in funds that have very high income guarantees.

Maturity

Segregated funds come with a maturity date attached. You are expected to hold onto your contracts until that maturity date is reached. You receive your payout only once you’ve held on until this point.

On the bright side, you can choose a payout schedule based on what the insurance company offers. You also get to choose a maturity date before you invest, so you’ll know what to expect from the start.

Summary Benefits and Drawbacks

Advantages: Segregated Funds in a TFSA Disadvantages: Segregated Funds in a TFSA
Pool Investments Risk
Guarantees & Protections Maturity
Beneficiaries Cost

Should I Consider Adding Segregated Funds To My TFSA?

If you want to invest in segregated funds, a TFSA is a great place to do so. Just remember that you don’t normally want to dedicate too much of your portfolio to one asset.

While segregated funds come with strong guarantees, they are still relegated to one space in the investment industry. On top of that, your TFSA has low contribution limits compared to other accounts like RRSPs. If you want to make a large investment in segregated funds, you should consider a different account.

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.

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