It’s one of the biggest mistakes entrepreneurs make: counting on your company to fund your retirement. “Optimistic entrepreneurs think that they don’t need RRSPs or any retirement savings because they’ve got a business,” says Michael Pollack, a Toronto-based financial planner for Investors Group Inc. “But if the business goes down, they’ve got nothing.”
So take steps to ensure your financial future. Invest now, invest often, and avoid these common retirement wreckers:
You wouldn’t make a business decision without considering all of your options. That 360-degree thinking should apply to your financial planning, too. “Choose your investments within the context of your other assets: your business, your non-registered investments and your spouse’s registered and non-registered investments,” says Terry Greene, senior advisor at MSC Financial Services Ltd. in North Vancouver, B.C. Consider your business to be the equity component of your portfolio, advises Greene. Then balance the risk with more conservative investments.
Pollack agrees: “Your RRSP should be held in categories such as GICs or bonds — those things that are steady and don’t move in the same cycle as the business. If your business sours, and your RRSPs are all invested in an asset that’s tied to the economy, such as equities, not only is your business down, so are your RRSPs.”
The cash infusion from a tax refund is one incentive to contribute to an RRSP. But if last year’s income was lower than usual and you still have money to invest, consider contributing to your RRSP without claiming the deduction, which you can carry forward indefinitely. Why? Lower-income earners are taxed at a lower rate, which means lower tax savings, says Greene: “You’ll get more bang for your buck if you deduct it in a high-income year.”
Haven’t incorporated your business? Then most of your personal assets — including RRSPs — are exposed to lawsuits and bankruptcy. One exception may be segregated funds. If the funds are purchased from an insurance firm and held in an RRSP with an immediate family member named as beneficiary, they’re immune to creditors. Of course, that peace of mind will cost you — management fees are typically 2% to 3% higher for segregated funds than for standard mutual funds.
In an attempt to keep more money in the business, many entrepreneurs pay themselves very little or forsake a salary entirely and compensate themselves with dividends, which are taxed at a lower rate. “But [a smaller salary] means by default that your RRSP contribution room is lower,” says Tina Di Vito, vice-president and national manager at BMO Nesbitt Burns. When deciding on your mix of dividends and salary, she advises, “Talk to your accountant or financial planner to figure out the right balance to not only minimize your income taxes, but also maximize your RRSP savings.”
Despite what the ads say, investing in RRSPs is not always the best option for entrepreneurs. “There are vehicles that can give tax deductions and do all the things that an RRSP does, but which are better savings vehicles, more tax-efficient and allow larger contribution amounts,” says Bob Carter, a financial consultant at Toronto-based Brant Securities Ltd.
If you’re 50 to 55 years old, for example, and haven’t accumulated enough assets in your retirement savings plan, consider an Individual Pension Plan, suggests Di Vito. A type of registered pension plan, IPPs allow for greater contributions than RRSPs do — which is good when you’re running out of time to build your nest egg. An IPP is set up through your corporation and administered by an actuary. Tax-deductible contributions are determined by several variables, including age and salary.
However, setting up this type of plan isn’t cheap, warns Carter. You’ll pay setup costs of anywhere from $3,000 to $5,000. Actuarial costs could run you another $5,000. On top of that you’ll pay annual administrative fees of about $1,500. It’s just another good reason why you should plan for retirement early and invest often.
© 2003 Susanne Baillie