Retirement Savings Plans (RSP) are designed to defer taxes to a later date. But who is to say you’ll be living a cheaper lifestyle at 60 than you are now?
Suppose you made $200,000 in 2020 and put $50,000 into an RSP account. The government lets you defer the tax until you decide to withdraw the funds. Most likely during retirement.
The idea is you’ll be living off less in retirement and not need a $200,000 income to live, therefore paying fewer taxes per year. But for many business owners, this is not what financial freedom looks like.
There are several issues with this traditional way of saving for retirement, especially for business owners.
Here’s some of them:
- Unless you are spending less and in a lower tax bracket at retirement, the government wins
- The CRA controls how much tax you will pay (who knows where tax rates are going to go from here!)
- If you pass away early you could lose half of your RSP to the government
- If you’re an incorporated individual and paying yourself $200,000 to put $50,000 into RSPs it’s costing you $75,000 in taxes to do that
If you’re a business owner and interested in finding out the most tax-efficient ways to save for retirement, book a call, we’d be happy to help.