Investing in an RRSP and TFSA as a business owner

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 accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition to keep your investments in. Registered Retirement Savings Plans (RRSPRRSP See Registered Retirement Savings Plan.+ read full definition) and Tax-FreeTax-free Money that you do not pay tax on.+ read full definition Savings Accounts (TFSATFSA See Tax-Free Savings Account.+ read full definition) are often used to help achieve personal retirement goals.

Investing in a Registered Retirement Savings Plan (RRSP)

RRSP contributions are taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition deductible and investments grow tax-free. If you are currently in a higher income tax bracketTax bracket The rate at which you pay tax, based on your income level.+ read full definition, 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 roomContribution room The amount you can put into a savings plan like a Registered Retirement Savings Plan (RRSP). If you do not put the full amount into the plan each year, you will have extra, unused contribution room that you can use in later years. Example: Let’s say you can contribute $12,000 to your RRSP this year,…+ read full definition. In contrast, if you receive a dividendDividend Part of a company’s profits that it pays to shareholders in proportion to the total number of shares held. The Board of Directors sets the amount. For common shares, the amount varies. It may skip dividends if business is poor or the directors invest money in things like new equipment or buildings.+ read full definition from your business, the amount is ineligible towards your RRSP contributionContribution Money that you put into a savings or investment plan.+ read full definition 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 taxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition bracket. TFSA withdrawals are tax-free as contributions are made with after-taxAfter-tax The money you have left after you pay taxes on money that you made working or investing.+ read full definition dollars. These accounts also offer you more flexibility because you can withdraw money at any time.

You can choose to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition 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.

Key Point

RRSPs and TFSAs can help you save outside your business. These plans offer tax advantages and can help you with retirement, emergencies, and long-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition financial goals

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