For years you’ve been focusing on saving and accumulating your nest egg, with the hopes of one day using it to enjoy your retirement years. Now that you're approaching or are already in retirement, you need to consider the options for turning your nest egg into a source of income.
In this column, I will focus on “T” class funds as a potential option to create tax efficient income in retirement.
What is a series “T” fund?
For non registered investments, a series T-fund, also referred to as T-Class can provide a regular stream of tax efficient cash flow from monthly distributions. All or a significant portion of the distribution received is considered a tax free return of capital (ROC), with the balance of your funds continuing to grow inside the fund.
There are several fund companies that offer T-series funds and distribution rates can vary from $0.05 to $0.08 per unit. Let’s look at an example:
Say you have $100,000 that you want to use to produce a regular monthly income. At a unit price of $12.618 the $100,000 would purchase 7,952.19 units of the fund. If the fund was a T8 series, it would have a distribution rate of $0.08 per unit producing a monthly distribution of $636.18.
Each time the fund makes a distribution in the form of ROC, the adjusted cost base (ACB) of the investment decreases. Since the ROC is considered after tax money, there is no tax payable on this cash flow; however, there may still be taxable distributions similar to those in a non T-series mutual fund. Once the ACB reaches zero additional ROC distributions are taxable at capital gains. Since capital gains are taxed at a 50% inclusion rate, the cash flow would still be considered tax efficient.
Another benefit of using series T-funds in your investment mix is that the ROC distributions can help lower the taxable income you report every year. By reducing the amount you report on line 234, it helps you maximize income tested government benefits such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) as well as income tested tax credits such as the Age Credit that are typically clawed back as you report higher levels of income.
If you would like more information on this topic or would like a review of your current financial plan, please call 778-478-9759, or e-mail [email protected]
This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, or life insurance, and should not be taken as providing, investment, financial, legal, accounting or tax advice. All services provided through NorthBay Financial Services. Mutual funds are provided through Sterling Mutuals Inc. Insurance is provided through multiple carriers. The opinions expressed are those of the authors and do not necessarily reflect the views or opinions of Sterling Mutuals Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds and Segregated funds are not guaranteed, their values change frequently and past performance may not be repeated.