Traditionally Registered Retirement Savings Plans (RRSPs) were the number one tool for Canadians to build their retirement funds. But if you’re a successful business owner, the chances are that you’ll never see the real benefit of an RRSP because they’re not set up to help you win if you still have a high income in your retirement years.
RRSPs are designed for people to invest while they’re in a high-income bracket with the expectation they’ll be at a lower income bracket when they withdraw. They get to enjoy the tax-year savings by reducing their current taxable income, as well as tax-deferred savings when the investment is growing. Finally, in retirement, if you are in a lower tax bracket you will be able to pay fewer taxes when withdrawing the money.
However, for business owners who have planned for retirement using their corporation, RRSPs just don’t work. Unless you can guarantee that at retirement you are going to have far less income than when you’re working, you’re never going to win.
The joy of being an entrepreneur or business owner is that you can build your business to enjoy the life you want to live. Part of that involves actively building a passive income ready for you when you retire. This could be anything from real estate, mutual funds, or investments in other businesses, but it means by the time you retire, the chances are you’ll continue to have a high income because of all these passive income sources.
If that’s the case, you could find yourself giving up to 50% of your RRSP to the CRA when you withdraw. Which is not the way you want to think about retirement.
Our advice is to take time now to set your goals and really clarify what you want from retirement. From there you can build a plan that helps you enjoy your life today and uses your corporate structure to plan a happy (tax-efficient) retirement.
Build your retirement plan in your corporation and the income and assets you grow inside it will far beat any tax savings you will receive today from investing in an RRSP.