LLQP Segregated Funds & Annuities · Component 2.4 · 30% of the exam
A low-income employee asks whether to direct her savings to the group registered plan or the group tax-free account. A relevant consideration is that:
- deductions are worth less at a low rate, and later withdrawals could reduce income-tested benefits
- Bthe registered plan is always better because contributions reduce taxable income immediately
- Cthe two accounts are taxed identically, so the choice makes no practical difference to her
- Dthe tax-free account is always better because it has no annual contribution limit at all
Correct answer: A) deductions are worth less at a low rate, and later withdrawals could reduce income-tested benefits
A deduction claimed at a low tax rate saves little, and registered withdrawals in retirement count as income for benefits that are tested on income. Tax-free withdrawals do not, which often favours the tax-free account for lower earners.
Why the other options are wrong
- BA deduction at a low marginal rate provides a modest benefit at best.
- CThe two accounts differ in both deductibility and the treatment of withdrawals.
- DThe tax-free account has an annual limit set by the government each year.
Exam tip
Low income now plus income-tested benefits later usually favours the tax-free account.
Common mistake
Recommending the registered plan to every client because of the deduction.
What this tests
CISRO competency component 2.4 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 2
- A segregated fund's 'guaranteed amount' after a partial withdrawal under proportional reduction is:
- A distinctive estate advantage of a segregated fund over a non-registered mutual fund held jointly with a child is:
- Segregated fund guarantees are most valuable relative to their cost when:
- A segregated fund's annual statement reports:
- Compared with a segregated fund, an exchange-traded fund (ETF) generally offers:
- A segregated fund's 'automatic death benefit reset' feature:
Practice the whole Segregated Funds & Annuities module
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