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Mutual Funds vs Segregated Funds

Segregated funds and mutual funds are very similar: they are both pooled, diversified, professionally managed investment funds. Segregated funds, however, offer some unique characteristics that mutual funds do not. These include maturity guarantees, resets, death benefits, creditor protection, and probate advantages.

What You Need to Know

  1. Maturity Guarantees – Unlike mutual funds, segregated funds offer maturity guarantees, which means that the value of your investment at maturity will not be less than the specified percentage of capital that you invest. For example: If you were to invest $1000 with a maturity guarantee of 75%, at the time your contract matures, the insurance company would be obligated to ensure that at least $750 of your investment remains.
  2. Resets – Segregated fund contracts offer the option to “reset” your investment, so that the gains your investment has accumulated can be accounted for when calculating the maturity guarantee amount.  Provisions for these resets vary by contract.
  3. Death Benefit Guarantees – Some segregated fund contracts offer death benefit guarantees. These work similarly to maturity guarantees, except your beneficiaries are guaranteed to get at least a certain percentage of your invested capital.
  4. Potential Creditor Protection – Unlike mutual funds, segregated funds are issued by insurance companies. Due to this, in some circumstances, investing in a segregated fund could offer you protection from your creditors.
  5. Bypass Probate – Investing in a segregated fund gives you the ability to pass your investment directly to your beneficiaries, without the need for probate. This can save a lot of money and hassle for your beneficiaries.

The Bottom Line

Segregated funds can offer some valuable benefits that investors do not have access to by investing in mutual funds. It is important to note that segregated funds traditionally have higher fees than mutual funds. As always, it is important to work with your team of financial planning professionals to determine what investments are best suited for you.

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RESPs 101

Not only has the cost of university risen sharply, but so has the importance of graduating with a marketable skill and knowledge set. In 2016, the cost of tuition, books, supplies, residence and travel for a student in an undergraduate program at a Canadian public university is approximately $20,000 per year.

For many new grandparents, Registered Education Savings Plans (RESPs) were not as commonly known as when their children passed through post-secondary education.

If you want to conscientiously pass wealth between generations and help minimize your grandkids’ debt load in the future, opening and contributing to an RESP on behalf of your grandchildren is an excellent option.

What you need to know

The opportunity to set aside a useful inheritance directly to your grandchildren for the expressed purpose of education is extremely appealing for many.

Although more in-depth analysis may be required to understand the eligibility for the Canadian Education Savings Grant (CESG), the quick RESP facts are:

  •  The CESG will match 20% of RESP contributions up to a maximum of $500/year per beneficiary and to a maximum of $7200 lifetime per beneficiary.
  • There are no minimum or maximum annual RESP contributions, but each beneficiary has a $50,000 lifetime contribution limit.
  • Contributions grow tax-free until they are withdrawn, like an RRSP.
  • Contributions are not taxed at withdrawal, only the grants and earnings withdrawn, called Education Assistance Payments (EAP) are taxed.
  • EAPs are taxed in the hands of the student, typically a lower income tax rate or no tax at all if their income is low enough

EAPs can be used for education-related expenses, including housing and transportation, when enrolled at any eligible domestic or foreign post-secondary institution or training program. You can contribute to an RESP up to its 31st year and it can stay open for 35 years.

Bottom Line

Canadian Education Savings Grants (CESG) provide an annual $500 and lifetime $7200 incentive to save for your grandchildren’s post-secondary education by contributing to an RESP. All the contribution and grant money will grow tax free to help fund any education-related expenses for your grandchild’s future education.

If you’re concerned about your children funding a post-secondary education for your grandchildren, give us a call. We can provide you with details and a plan that will allow your grandkids to go after their dreams!

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