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Retirement savings for a small business owner
It’s a big job focusing on the daily tasks of running a small business. While you’re addressing your immediate business priorities you might be postponing thinking about your financial future, including your retirement. It’s a good idea to make time to select the best registered account to keep your investments in. Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) are often used to help achieve personal retirement goals.
Investing in a Registered Retirement Savings Plan (RRSP)
RRSP contributions are tax deductible and investments grow tax-free. If you are currently in a higher income tax bracket, an RRSP may be a good option for you. Keep in mind, you must pay tax on your withdrawals, however, most Canadians are in a lower tax bracket when they retire.
If you pay yourself a salary from your business, the amount is considered “earned income” and is eligible for calculating your RRSP contribution room. In contrast, if you receive a dividend from your business, the amount is ineligible towards your RRSP contribution room.
Investing in a Tax-Free Savings Account (TFSA)
You might want to consider starting a TFSA if you are currently in a lower income tax bracket. TFSA withdrawals are tax-free as contributions are made with after-tax dollars. These accounts also offer you more flexibility because you can withdraw money at any time.
You can choose to invest in both an RRSP and a TFSA at the same time. Consider your personal finances and tax situation, or seek support from a financial advisor, when allocating money to either an RRSP or TFSA.
Getting money out of your business
If you pay yourself a salary, you may need to remit CPP contributions, EI amounts, health premiums and income tax deductions.
If you pay yourself dividends, you don’t remit CPP or EI. You will also be taxed at a lower rate than if you paid yourself a salary. You can also declare your dividends at a time when it gives you the best tax incentives for your business.
There is also the option to use a combination of salary and dividends to meet your financial needs.
RRSPs and TFSAs can help you save outside your business. These plans offer tax advantages and can help you with retirement, emergencies, and long-term financial goals