Deposits inside an RRSP and TFSA can be protected by CDIC.
Besides savings and chequing accounts, RRSPs and TFSAs (tax-free savings accounts) are the most important vehicles that Canadians use to fund their retirement or to save for what’s important in their lives.
According to a January 2014 survey by the Bank of Montreal, 64% of Canadians make use of RRSPs, while Statistics Canada reports that $35.7 billion was saved in these accounts in 2012.
Naturally, Canadians want the assets in these accounts to be protected. It’s their retirement savings, after all, and if any of it goes missing due to the failure of a financial institution, then their post-working lifestyle could be placed in jeopardy.
Fortunately, most people have nothing to worry about. If a bank ends up closing its doors, Canada Deposit Insurance Corporation (CDIC), a federal crown corporation that was created in 1967, provides free and automatic insurance for eligible deposits up to $100,000. Most Canadians are covered.
“If protecting your clients’ savings is important to you, then CDIC can help ensure their hard-earned money is safe,” says Brad Evenson, CDIC’s director of communications and public affairs.
CDIC will cover up to $100,000 invested in cash or in a guaranteed investment certificate (GIC) with a maturity date of five years or less. However, it doesn’t protect mutual funds and stocks from a fund company going bankrupt.
Advisors need to keep an eye on investment growth inside the RRSP, says Evenson, because any gains above $100,000 that those GICs generate are not protected by CDIC.
“You wouldn’t want to put a $100,000 GIC into the account because the interest you earn will soon take you over the coverage limit,” he explains.
Investors can also sleep well knowing that money in their TFSA is covered too. In 2009, after the TFSA was introduced, the Canadian government changed the Canada Deposit Insurance Corporation Act to include this new registered account.
While most people won’t have $100,000 in their TFSA yet — only $31,500 of contribution room has been built up since this savings vehicle was introduced — any money in cash or term deposits would be protected in a financial institution failure.
More money, more accounts
If investors have more than $100,000 they want to keep safe, they should consider using both an RRSP and a TFSA, says Evenson, as the Act allow depositors to protect up to the maximum amount in separate categories.
In other words, if someone has $100,000 in a five-year GIC at a bank and $31,500 in cash in their TFSA at that same institution, the money in both of those accounts will be protected.
“If a client has a $400,000 inheritance, for example, and wants to make sure that it is all protected, then the financial advisor could maximize CDIC coverage by putting it into various accounts,” he says.
By taking advantage of CDIC protection — and maximizing that coverage — your clients can sleep well knowing their retirement dollars are safe, no matter what happens to their bank — as long as it is a member of CDIC.