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Retirement for Business Owners
For Many business owners the ability to save and invest for retirement has been directly impacted by current the economy in Kelowna.
When sales and profits are down, saving and investing for retirement are not always the top financial concern.
The other day I was asked by a number of my friends at the Okanagan Business Referral Group (OBRG) about my ideas on how to best to deal with retirement as it relates to business owners.
Here are 3 ways of investing to create an income stream for retirement if you are business owner.
1. RRSP + TFSA + Investment Account
To use an RRSP effectively you must have T4 income (taxable income) to deduct your contributions.
For many this can be good choice to start. The idea is to have enough income to get the maximum benefit from CPP. Of course this also mean that you will have to contribute to Canada Pension Plan, but this can be a great way to build some stability in your retirement income. To find out the latest on Canada Pension Plan check out Services Canada website at http://www.servicecanada.gc.ca/eng/isp/common/cricinfo.shtml.
Once you have determined how much income you will draw from your business, if you have cash flow left over the next choice is the TFSA. The contributions cannot be deducted from your income but future withdrawals can be made on a tax free basis. For more information on the TFSA check this link from Invesco Trimark.
If you have exhausted these two then your next financial option is to use a personal investment account. You can hold stocks, bonds, corporate class mutual funds, even GIC or Term deposits. Tax efficiency is important in your investment account, as you lose the tax deferral of the RRSP and tax free growth of the TFSA.
2. Individual Pension Plan
A business owner can also set their own Individual Pension Plan (IPP). The plan was created to give business owners some of the benefits of a pension plan, as given to many employees in Canada. The plan allows larger contributions than RRSP, can be back dated from when you started the business and is creditor protected.
The downside is the plan has minimum and maximum annual withdrawal limits, is more complex to administer than a traditional RRSP / TFSA / Investment Account and has costs to establish and administer.
For more on an IPP check out the Mackenzie Financial website here.
3. Investment Account Inside Your Business
Another option to a business owner is to open an investment account inside your business to fund your retirement income.
The account is opened in the name of your business and contributions are made by the business. In the future if you choose to keep your business you can remove money from the fund to pay you an income. If you choose to sell your business you can take the money with you.
Of course any withdrawal would be taxable, and the accounts income would be subject to taxation, but at least this part of your business is easily liquidated as need. If a segregated fund is used and the owner(s) are named as beneficiary(ies) the assets could also creditor protected.
The idea is that the company or corporation will pay less tax on the growth over time than collecting a personal income with the benefits of an RRSP.
So which strategy is right for you and your business?
The first thing to do is to see your financial advisor and come up with how much you will need to create an reasonable retirement income. Factor in all your financial affairs like the your personal debt, and government benefits.
Then see your accountant / business advisor. Which way to go will be based on your income, how much you can expect to get when you sell your business, if you choose to continue run your business in retirement and how your business is structured.
After working for years on your business would it be nice to have a comfortable retirement to show for it!
(Thanks to my friends at Okanagan Business Referral Group (OBRG Thursday). Their feedback was the basis for this post. If you are looking for a way to promote your Kelowna business through referral marketing with other like minded business professionals.... make sure to attend the next Thursday meeting. For more information try http://obrg.ca/about/)
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3 Response to "Retirement for Business Owners"
Nowadays, it is just practical to invest on something that you can make use on the future. By the way, thank you so much for sharing us this useful post. Keep it up!
Rachael
Business loans Philippines
Thanks for the feedback Rachael!
Thanks for the good info Mike! I like the easy to follow options. Next to get the accountant on board...
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