Too many successful business owners are pulling money out of their corporation to invest in a Tax-Free Savings Account (TFSA).
A TFSA provides the opportunity to grow your money tax-free. It’s advantageous for individuals. However, for business owners, the cost of contributing to a TFSA may outweigh the benefits.
We’re going to share why as a business owner, you shouldn’t pull money out of your corporation to invest in a TFSA.
How Does a TFSA Work?
A TFSA is a Canadian investment account that allows the investment in the account to grow and be withdrawn tax-free at any time.
Unlike an RRSP designated for retirement savings, a TFSA is an investment account that can be used for anything. And the contributions into a TFSA are not tax-deductible, which is an important factor that brings us to our main point.
(Not sure how to plan for retirement? Here’s everything you need to know to start retirement planning)
Invest Inside Your Corporation, not in TFSAs
TFSA contributions can only be made by an individual, not a corporation. Consequently, you must pull money out of your corporation to contribute to a TFSA, meaning you have to first pay personal taxes based on your income level.
You end up having significantly less money to invest in your TFSA after paying personal tax. As a result, this offsets the benefit of tax-free growth in the account. Now, if you leave the money in your corporation, you don’t have to pay that extra layer of personal tax.
You can invest that money directly within the corporation and start with much more money. Find your investments growing larger and much faster.
So why would you pull money out of your corporation and invest it in a tax-free environment only to have to pay a layer of personal taxes first?
(Have some investment planning questions? Take a look at these 12 FAQs every business owner needs to read)
The Strategy to Maximize Tax-Free Growth
A much better strategy is to leave this money inside your corporation, make sure to invest in tax-efficient vehicles, and maximize the growth. Then with innovative strategies, you will have the ability to get that money out tax-free.
In summary, as a business owner, you should avoid investing in a TFSA with after-tax personal dollars that you pulled out of your corporation. If you’re not putting these strategies in place right now, then you may be losing thousands of dollars which affects your ability to reach your goals.
Book a call today, and we’ll help maximize the use of your corporation.