Retirement Savings Plans (RSPs) are designed to defer taxes to a later date. But who is to say you’ll be making less income at 60 than you are now? As a business owner, you are more than likely to have built different passive income sources; meaning you’re still likely to be making a high income at retirement.
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. This is most likely at the time of retirement.
The idea is you’ll be living off less in retirement and won’t need a $200,000 income, 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 are 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
(Worried about giving half of your retirement savings to the CRA? Give this blog a read)
Watch the video on this strategy
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.