We hear from many incorporated professionals and entrepreneurs who tell us they’re using their Retirement Savings Plan (RSP) as their number one vehicle for retirement savings. But is this really the best strategy? If you ask us, not usually—for most entrepreneurs, this isn’t the most tax-efficient way to save for retirement.
What is a Retirement Savings Plan?
Maybe you already have a Retirement Savings Plan. Or perhaps it’s just one option you’re considering to fund your financial future.
Either way, you might not be completely clear on exactly how they work.
Let’s fix that!
Here’s how the Government of Canada defines a Retirement Savings Plan:
Registered Retirement Savings Plans or RRSPs.
“A savings plan designed to help you save for retirement. RRSPs help you grow your money while offering tax benefits. For example, you may get a deduction on your income tax return, depending on your income and how much you contribute to your RRSP. You also don’t have to pay tax on the money you earn within your RRSP as long as the money stays in the plan.
You can claim a deduction on your income tax return for RRSP contributions up to your RRSP deduction limit. This is typically 18% of your earned income for the prior year (up to a maximum set by the Government of Canada).”
Sounds pretty good right off the bat, doesn’t it? Tax savings are always appealing. But is this option really the most strategic for people who own a corporation? You can probably guess what we’re going to say…
(Speaking of strategizing, don’t miss this post where we discuss the most effective insurance strategy for business owners)
The Problems with Retirement Savings Plans
Here’s the thing: with an RSP, you’re essentially going into business with the government. The problem with this is that you have no idea how much of your money they will take at the other end.
RSPs mean you get a deduction when you put money in, but if you take money out? Then you have to pay tax!
If you’re an incorporated and financially successful professional, you’re likely going to be in a high tax bracket when you pull money out of your RSP. You may even be at a higher tax bracket than you’re in today. This depends on your income in retirement and if the government decides to change those brackets in the future.
(Not sure if incorporating is the right move for you? This can be a fantastic financial planning tool, and it’s one we don’t want you to miss out on if it would benefit you. Click here to read about the telltale signs it’s time to incorporate your business)
If You Have a Corporation
Instead of an RSP, we recommend leaving your money in your corporation and utilizing your corporate structure to get the maximum benefit of tax-deferred growth.
At Ocean 6, we have innovative ways of helping our clients invest for retirement and take money out of their corporation in a tax-efficient way that doesn’t involve making a deal with the Government.
Do you want to learn more about structuring your retirement and utilizing your corp? We should talk about what our financial planning process The Blueprint can do for you.
The Blueprint by Ocean 6 is an innovative six-step plan to help Canadian business owners organize and clarify their financial future. It’s an experience that leaves you excited instead of keeping you up at night with uncertainty.
Click here to book a call, and we’ll go through the Ocean 6 Blueprint process with you.
Did you learn a lot about retirement savings plans in this post? Here are three more posts to read next:
- Defining Your Financial Goals Beyond “Make More Money”
- Why Successful Business Owners Should Not Use RSPs
- Stop Giving Half Of Your Retirement Savings to CRA