RRSPs, TFSAs, Life Insurance, Non Registered Mutual Funds, Stocks, Bonds
This article is written primarily for those of you who are planning on retiring within a few years or who have already retired. If you are not retired yet, or are very near retirement age, or even early in retirement, you might be wondering if you should be putting money into RRSPs, into Non Registered Investments, Life Insurance, or into TFSAs?
- You have no consumer debt
- You have no significant debt of any type
- You have life expectancy of at least ten more years
- You will be receiving CPP and OAS as you reach the appropriate age.
- You have money in RRSPs or RRIFs, possibly are receiving some monthly income from a RPP, have some non-registered money(GICs, Savings Account, mutual funds, stocks, and/or bonds)
RRSPs— yes or no?
It really is a pretty easy answer: Yes, if your income is higher in the current year than it will be during future years and no, if it isn’t. I recomend if you are already in the lowest tax bracket, i.e. your taxable income is less than ~$42,000 in 2012, that you don’t bother buying RRSP’s since you cannot be in a lower tax bracket during retirement.
TFSAs– yes or no?
Absolutely yes. Finding the money to invest inside a tax sheltered savings vehicle like a TFSA is a must. Why? It is tax protected for you for as long as you live and the value even passes on tax free and estate fee free to your named beneficiary.
Very simply—There is no better deal!
Life Insurance– yes or no?
Yes, if you have some extra money you will definitely not be spending and want to leave some tax-free, probate-free funds to your named beneficiaries. The additional benefit is that unless you live well beyond life expectancy, the net value of your estate will be greater to each of your beneficiaries than if you would just have left the funds in a non-registered investment and paid the tax on the gain each year.
To best answer the question—where should your money be — it comes down to understanding the following scenario. Many of you have been, or will soon be, the Executor/Executrix of one of your parents’ estates. Wouldn’t it have been great if your parent’s estate would have consisted exclusively of the proceeds from a life insurance policy and/or a TFSA?
Why you ask?
Very simply, it would have passed tax free, estate fee free, and, as importantly, ‘hassle free’, to each named beneficiary. Very simply, it couldn’t be easier! The reality is, however, TFSAs have only been here for a few years(2009) and the amount we are permitted to contribute to them is only $5,000/individual/year so no one can have accumulated a whole lot of money in TFSAs as of yet.
In addition, your parents, in all likelihood, didn’t have a lot of money that they definitely knew they would never need, so it was virtually impossible for them to have any sizeable amount of money inside a life insurance policy.
But, if we can turn the clock ahead a few years, won’t it be easier for our Executors to administer our estate if as much as possible is in our TFSAs and life insurance policies?
Bottom line recommendations:
- Whatever money you definitely will not be needing should be used to purchase a life insurance policy. Or, if you already have one, you could dump extra money into it in order to enhance its’ tax free value to your named beneficiaries. Remember—it is the after tax death benefit value that matters, not the cash value.
- Maximize your TFSA each year, regardless of your age. If you don’t have the money, use other sources such as your non-registered investments or your RRIFs(provided you don’t enter into another tax bracket when you withdraw the funds. Invest these for the long term.
- Leave the rest of your money tax protected until you need it. This could be in the form of RRSPs or RRIFs. You could also use the “Class” Structure of Mutual funds offered by most fund companies at this point in time. While these have only been around for a few years and do not guarantee they will have no annual distribution, history has shown that they have significantly less distributions than do regular mutual funds. You are also permitted to switch between funds without incurring capital gains, as long as the funds are under the same class structure.