As advisors consider how to strategically use the new tax-free savings accounts (TFSAs) that go into effect in January, one of the nation’s largest insurance companies emphasizes that investors should not discount their insurance needs.
Sun Life Financial announced that it will offer TFSA solutions to both retail and group customers when accounts become available on January 1, 2009.
Sun Life Financial will offer retail customers a TFSA investment option in the form of accumulation annuities and GICs, as well as a suite of SunWise Elite segregated funds. Employers using Sun Life Financial group plans can also make TFSA options available to their employees.
Dean Connor, president of Sun Life Financial Canada, emphasizes that with fewer restrictions on the savings products that can be used within a TFSA, Canadians should work with advisors to evaluate which TFSA products best suit their retirement goals. may include insurance products.
“TFSA is the most important saving incentive for Canadians since the introduction of registered pension plans,” says Connor. “Every Canadian can benefit from this flexible account, from saving for a down payment on a home to providing additional income for retirement. With so many options for this account, working with a financial advisor is key to determining how a TFSA best fits into your overall financial plan.
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For example, Sun Life argues that baby boomers could use a TFSA to directly fund future health care costs or pay future premiums for insurance such as personal health insurance. The retiree could use it for an extended health care plan or long-term care insurance.
“Our research shows that a significant number of Canadians said they were concerned about having to cover health care costs in retirement, but most had not planned for it,” says Connor. “We know that rising health care costs are a concern for Canadians, and a TFSA can provide a powerful incentive to help people plan for health care expenses in retirement.”
For example, on the group side, Sun Life says the TFSA will enable employees to effectively save tax-wise to fund future health care expenses and health insurance premiums under Sun Life Financial’s Enhanced Health Insurance coverage. Policies can be purchased without proof of good health if employees apply within 60 days of leaving their current health benefits plan.
On the other hand, the TFSA could also reject the use of other insurance products, particularly Universal Life products, notes Preet Banerjee, wealth advisor at Scotia McLeod.
Once the TFSA begins to accumulate contribution room – it is limited to just $5,000 for 2009 – it can outpace the leveraged deferred compensation strategy, which involves overfunding a Universal Life policy and using it as collateral for an investment loan.
Banerjee says this strategy is commonly implemented by wealthier investors who max out their RRSP contribution limit. The loan will eventually be repaid from the proceeds of the insurance policy, and there is usually money left that has actually grown tax-free.
“If someone has maxed out their RRSP and wants to reduce taxes, until now the only way to achieve tax-sheltered growth over long periods of time is to introduce an investment element to a UL policy,” he says. “Really, any policy must prove the need for coverage, but many people choose UL coverage as a way to create wealth rather than to provide for needs.”
With a TFSA, Banerjee says you get all the benefits of a leveraged deferred compensation strategy without having to buy insurance.
“The downside is that you only get $5,000 per room initially. With many UL policies, you’re looking at people investing $50,000 or $100,000 and overpaying over time. “It doesn’t give you as much room to contribute, but if you continue to contribute every year, it will certainly be a viable alternative,” he says.
In fact, Banerjee says there’s a reasonable case to be made for keeping a stock-only TFSA for clients with a longer-term investment horizon because it’s completely tax-free.
“If you use both an RRSP and a TFSA, it may make sense to place stocks in a TFSA if they are expected to grow faster than fixed-income investments over a long period of time and the withdrawal of funds will not be taxed.” He says.
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Banerjee gives the example of an investor with a 30-year investment horizon who is currently in the 40 percent tax bracket and expects to be in the same bracket when he withdraws his money. If an investor contributes $1,000 to each RRSP and TFSA account – including reinvesting the RRSP’s $400 refund – the TFSA will provide a higher return because it will not be taxed at the time of withdrawal.
If a $1,000 TFSA is invested in stocks and grows at an average rate of 10% per year, it will be worth $17,449.40 after 30 years. A $1,400 RRSP contribution would grow to $24,429.16 at 10% over 30 years, but taxes imposed on the RRSP withdrawal would leave the investor with just $14,657.49. The TFSA provides the investor with an additional $2,791.91.
“As long as you don’t violate your overall asset allocation, it makes sense to put as much of your stocks in a TFSA and as much of your fixed income in an RRSP as possible.”
Submitted by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com
(09/04/08)
