Photo by: Ken Teegardin licensed under Creative Commons Attribution 2.0 Generic
Financial planning is critical to a comfortable retirement.
But, too many business owners are following the same financial planning strategies that their employees are following and are jeopordizing their ability to retire as a result.
Traditional planning from some very successful “barbers” say you should pay yourself first. Take 10% of each paycheque and put it into your retirement fund as the first thing you do each and every month.
For traditional employees, who have no control over the form of income they receive (i.e. they receive a salary, plus the odd bonus) this is a prudent strategy. Either put aside 10% of your monthly paycheque or run the math to determine how much you need to put aside each month to accomplish your long-term retirement income goal. Utilize an RRSP as the vehicle to put the funds into (which creates an immediate tax deduction and allows for long-term tax deferral). This is prudent financial planning – for traditional employees.
But, when you’re an employer – this could kill your business.
As an employer, you are able to choose not only how much income to receive but also what type of income to receive. And, not only that, you are able to convert a lot of personal expenses into business ones.
So, if you are a business owner and you are taking more out of your business just so you can put it aside into an RRSP, you are taking vital cash from the business, pushing your personal tax bracket up just so you can then put the remaining cashflow into your RRSP to then get an offsetting deduction to then grow the funds on a tax-deferred basis just to be forced to take the funds out of your RRSP at age 71 in the form of a RRIF to then pay tax on an even higher amount and force your overall taxable income in retirement through the roof. This doesn’t sound like the best strategy.
Prudent financial planning for business owners takes into account the following options only available for business owners to assist in their wealth accumulation in a tax-preferred way:
- Income splitting with family members to keep the overall family tax burden to a minimum.
- Increase tax-sheltered contribution room through the use of an Individual Pension Plan so that you can put aside more for retirement in a tax-efficient manner.
- Potentially pass retirement assets to your child beneficiaries tax-free through the use of an Individual Pension Plan.
- Invest surplus retirement funds corporately instead of personally so that you can keep income taxes lower on the surplus funds.
- Take advantage of the Capital Dividend Account available to business owners through a properly structured Wealth Protection Plan as a way of growing and utilizing these accounts during your lifetime and transferring the residual wealth tax-free on death.
And the list goes on.
If you are a business owner, I know one thing for sure. You don’t need to take any extra risk with your retirement finances – you’re already taking a risk by being a business owner.
Bottom line is this. If you are a business owner and you are following the traditional financial planning advice that is geared toward your employees – you are missing a lot of wealth creation and protection opportunities.
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