Annuitizing Income Before the Deadline
What are the Benefits?
Are you looking for a predictable income solution for your retirement? Guaranteed products such as annuities can help ensure your fixed costs are covered, while offering tax-efficient income compared to traditional fixed-income investments and protection from a sudden market downturn.
Traditionally, investors requiring income look to bonds and Guaranteed Investment Certificates (GICs). However, the interest from these investments is taxed as ordinary income at high marginal tax rates, which can leave you with less after-tax income.
Gain Greater After-Tax Income with Annuities Annuities are income-generating insurance contracts that can be purchased with registered or non-registered funds. The most common type of annuity is a “prescribed annuity” (for either single or joint annuitants), which you purchase with non-registered funds. Because prescribed annuity payments are a blend of calculated interest (taxable at your marginal rate) and a return of capital (non-taxable), you generally retain more after-tax income. In some cases, depending on your age, you may pay zero tax if the payments are all return of capital.
A Component of a Fixed-Income Portfolio While they can offer tax-efficient income, annuities are irreversible and the payments are permanently locked in at a certain level. In addition, outside of the contract guarantee period, there is no residual capital from the annuity at death (although annuities can provide guarantees to ensure income payments continue for a defined number of years if death occurs prematurely). Therefore, for most income-oriented investors, annuities may be suitable as one component of a well-diversified fixed-income portfolio.
Income-oriented investors concerned with capital preservation may also consider allocating a portion of the annuity income towards a life insurance policy for estate transfer purposes.
Purchase Annuities Before Year-End to Maximize Tax Advantages The government is changing how it calculates the taxable portion of prescribed annuity contracts and, as a consequence, the taxable portion will be higher for prescribed annuities purchased on or after January 1, 2017. Annuities established before this effective date will be grandfathered under the existing tax rules, provided they meet all the requirements on December 31, 2016.
The grandfathering provision provides a significant tax motivation for anyone in or near retirement to consider a non-registered annuity before January 1, 2017. The table below compares identical annuities where the taxable portion is calculated using the existing formula and the new formula taking effect January 1, 2017. It shows that the long-term, after-tax benefits of purchasing an annuity before year-end may be considerable. Please speak with your advisor if you would like to consider annuities before these changes come into effect on January 1, 2017.
This publication is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. The examples provided in this article are for illustration purposes only and are not indicative of future returns. Interest rates, market conditions, tax rules, and other investment factors are subject to change. Insurance products are offered through RBC Wealth Management Financial Services Inc. (“RBC WM FS”), a subsidiary of RBC Dominion Securities Inc. In Quebec, financial planning services are provided by RBC WM FS which is licensed as a financial services firm that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® Registered Trademark of Royal Bank of Canada. Used under licence. ©2015 Royal Bank of Canada. All rights reserved. 15_90908_001