Retirement planning is essential for business owners and self-employed individuals at any age, especially if they won’t be receiving a traditional pension. Business owners face an array of challenges that, in the short-term, seem more important. However, it’s important that they create a plan now, that will help them to achieve their retirement goals, whether that’s around the corner, or 20 years away.
One of the easiest savings strategies, if you can afford to implement it, is to set up monthly contributions to your investments. There are two big benefits to this strategy. You won’t have the financial strain of having to assemble a large sum at any given time. And you're able to invest consistently throughout the year, which means you can pick up more units or shares at times when the price of the investment is low. This is commonly known as dollar cost averaging.
RRSPs generally offer two tax advantages – contributions are usually tax-deductible, and your returns are tax-deferred. When it comes time to make withdrawals, that RRSP money will be taxed at the same rate as any earned income or interest.
One strategy is to ensure that you have a component of non-registered investments that pays dividends, capital gains, or return of capital.
People who have a corporation and pay themselves a salary can usually set up an Individual Pension Plan (IPP) to increase their pension savings.
Basically, an IPP is a company-sponsored defined benefit pension plan, with a membership of one.
Who usually stands to benefit the most from an IPP? In most cases, individuals who are at least in their early 40s and who earn over $100,000 annually. In these circumstances, the maximum IPP contribution is usually higher than the RRSP limit.
For the company, IPP contributions are usually tax-deductible. If the owner has run their company for some time, he or she may be able to make a lump sum, catch-up contribution. There’s an expected rate for investment earnings within an IPP, currently 7.5% per year. If actual earnings are less, the company can contribute additional funds to top up the shortfall; this isn’t possible with an RRSP.
An Insured Retirement Plan (IRP) usually offers tax-free supplemental income through tax-exempt life insurance.
This makes sense if you’re at least 10-15 years from retirement, already making your maximum annual RRSP contributions, and in need of life insurance. You also generally need good health, excess discretionary income, and an insurance need such as estate planning or business succession.
With an IRP, an individual buys universal life insurance. The annual deposits are invested, with tax-deferred growth. Upon retirement, you can assign the cash surrender value as collateral to a lender. In turn, the lender provides annual loans, and here’s the best part – the loans aren’t considered income for tax purposes. What happens when you die? The outstanding loans are repaid by the face value of the insurance, with the remainder available for your beneficiaries.
The key is getting the right financial advice, and giving yourself enough time to take advantage of all the options available to you.