As an entrepreneur, saving for retirement may be the furthest thing from your mind. With no employee-sponsored retirement plan, it can be tempting to forgo retirement contributions when establishing your own business. Although it may not seem important in the early years, this misstep can be detrimental to your financial future.
If you are just beginning to save, in Canada a Registered Retirement Savings Plan (RRSP) is a powerful tool to help you save for your future while benefiting from tax deferral opportunities. Anyone who files an income tax return and has earned income can contribute to an RRSP.
Shane Dubin is a Toronto wealth management executive with two decades of experience in the industry. He currently serves as the Senior Vice President, Investment Advisor and Portfolio Manager at Canaccord Genuity, where his clients work with him to uncover every available solution to ensure a prosperous financial future.
We recently asked Shane to answer some common questions he gets from clients about RRSPs and saving for the future.
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As an entrepreneur, how much should I be setting aside every month for my retirement?
Shane Dubin: I recommend creating a budget to determine how much money you will need to save. With that said, the reality for many entrepreneurs is that it may not be possible to set aside a large amount of money every month since most of your capital is going toward the establishment of your business. There are several resources you can use online such as a retirement calculator to help you determine how much you will need to save over time. The earlier you start, the better, and you always have the option to increase your retirement contributions as your business grows.
What are the advantages of hiring an Investment Advisor to discuss your RRSP strategy?
Shane Dubin: A professional advisor can help you establish and implement the right investment strategy for your RRSP based on your goals, risk tolerance, responsibilities
and values. They can also assist you with managing your RRSP within the context of your financial plan, so you have the best chance of achieving your savings goals.
How much can you contribute to an RRSP?
Shane Dubin: Currently,the allowable contribution room for 2019 is 18% of your earned income from 2018 or a maximum of $26,500. It’s important to note, earned income includes salary or wages, alimony received and rental income, but does not include investment income. Additionally, if you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.
What are the tax advantages of opening an RRSP?
Shane Dubin: RRSP contributions can minimize income taxes in two ways: one, contributions up to your RRSP contribution limit can be treated as a deduction from your annual income.
Second, capital gains and income can compound tax-free inside your RRSP. Taxes are payable only when the funds are withdrawn – typically in retirement, when you may be in a significantly lower tax bracket.
How long can I keep my RRSP open?
Shane Dubin: You must close your RRSP by December 31st of the year you turn 71. At this time, you will have two options:
1. Deregister all of the assets in the RRSP — the entire value of the assets withdrawn are treated as taxable income in the year withdrawn.
2. Transfer the RRSP to a retirement income option like a Registered Retirement Income Fund (RRIF). A RRIF can be viewed as an extension of your RRSP. Your RRSP is used to save for your retirement, while a RRIF is used to withdraw income during your retirement – and, like an RRSP, a RRIF allows for tax-deferred growth, offers several investment options and is government-regulated.
Can I borrow from my RRSP before I reach retirement age?
Shane Dubin: You can, however, you may pay significant taxes on your withdrawal. With that said, there are two ways to borrow money from your RRSP tax free: Buying your first home and paying for education or training. Under the Home Buyers’ Plan, you and your spouse each can borrow up to $25,000 from your RRSPs for a down payment on your first home. You won’t pay any tax on the money as long as you pay it back over the next 15 years. The Lifelong Learning Plan allows you to borrow up to $20,000 from your RRSP to pay for full-time training or education at a qualifying institution. A maximum of $10,000 may be withdrawn from the RRSP per calendar year and the total amount withdrawn must be repaid over 10 years.
