by Meiz Majoub
Last month, our topic of discussion was the difference between Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA). Both registered plans have been designed by our Federal Government to help save and grow our money towards our eventual retirement.
It’s a well-known fact that it’s not how much you have, but how much you get to keep which is very important.
The challenges are:
- How can I create an asset today and maximize the tax efficiency into the future?
- How can I minimize the risk of volatility and lastly:
- How can I create an income for life?
There are a few simple solutions and one is basically using the TFSA with a Guaranteed Minimum Withdrawal Benefit (GMWB) product. These products are issued by the insurance industry and they are slowly being withdrawn. This is due mainly to its popularity, government restrictive requirements and lastly, the insurance companies are having difficulties in making money from these products, due to several factors, low interest rates being one of them. So if you can go and get one, speak to your Advisor and lock yourself into one. According to research available, most Canadians hold their TFSA in Savings accounts and term deposits.
Instead of these TFSA invested in very low or low bearing interest accounts, they can be invested in GMWB building Tax Free guaranteed income for Life. One of the few remaining companies also gives you the potential to take advantage of market growth and a 5% annual income Bonus Base.
The limit for 2017 TFSA is $52,000 with an annual contribution of $5,500. (Most plans have a minimum investment to start of $10,000). Assuming at age 40 in 2016, one invested their full contribution limit of $46,500 followed by an annual contribution of $5,500, by age 64, the portfolio value could be worth $445,001 with a guaranteed annual income of $17,800 tax free.
Some of the features of this product are the following:
- 5% Income Base increase in every year that no withdrawals are made
- Can be joint or single life
- Automatic income reset- meaning one is not tied to the income that they started with should the market improve. If the market didn’t improve, you’re still guaranteed income for life from when you started withdrawal, usually at age 65 or anytime after age 55
- Management Fees are very competitive
- Low minimum investment of $10,000
- Potential for higher growth with investment options including equity exposure
- Death and maturity Benefit Guarantees
- Income Base and Bonus base automatically resets every 3 years, so if your investment grew better than the 5% annual bonus, a reset every 3 years will enhance and give you a potential higher retirement income. This is a very important feature which you must understand well to appreciate.
- Many more options and advantages
In a nutshell, for your retirement income, you can set up your own pension plan. The key is to understand it. There’s obviously a cost to this, but at the end of the day;
- Your funds are guaranteed
- Growth is guaranteed- if you understand the income base bonus
- Death benefit is guaranteed
- Income is guaranteed
- Death benefit flows to your beneficiaries without probate
These guarantees are all imbedded in Segregated Funds.
At the moment, only a few insurance companies offer any decent part of what’s provided above and they will not be available for too long.
You don’t lose, so this is time to stop wasting your hard earned savings in near zero interest environments. Use your TFSA and GMWB to create a sustainable tax free stream of guaranteed income in Retirement.
I encourage you to speak to your financial advisor and please stay away from the banks as this is not available there. The bank insurance arms don’t have them either.
About the writer
Meiz Majdoub, B.Comm, is a financial professional with over 30 years of experience and is accredited with a CLU, CH.F.C. He is also a member of the Conference for Advance Underwriters (CALU). and the Estate Planning Council Of Ottawa. He has helped individuals, organizations and corporations attain their goals in the areas of Financial & Estate Planning, Insurance, Living Benefits and Employee/ Group Benefits. He can be reached at: 613-749-4007, or [email protected]