Small Business Retirement Strategies

entrepreneurs should be aware of small business retirement strategies

As someone who comes from a family of entrepreneurs, I totally understand how difficult it can be to put money into retirement savings. In fact, it seems that most of my family members are planning to rely on the sale of their small business to fund their retirement, which is understandable because much of their earnings are reinvested into their business. A recent TD poll says we’re not alone. In fact, the majority of small business owners in Canada (66 per cent) plan on using the proceeds from their business to fund their retirement. Of those, 14 per cent are counting on that sale for their retirement funds.

Experts, though, say that this is a risky move. They especially advise against putting all of your eggs in one basket. Yes, the proceeds from the sale of your small business could fund your retirement – at least partially – but you should take other modes of action. Doing so will provide you with a safety net and help you to maximize your retirement earnings. Consider balancing your portfolio out with other investment products, including GICs and mutual funds. Here are some retirement tips for small business owners who want to diversify their portfolio:

Open an RRSP

RRSPs are both safe and reliable. In fact, many consider them to be the best savings and investment vehicles out there. Take advantage of all that an RRSP has to offer – they’re tax-deferred and offer compound growth. And while it’s understandable that much of your money as a small business owner is tied up in the business, there’s usually more wiggle room than you want to admit. Set up regular, automatic payments and over time you’ll barely notice the missing money. 

Open a Tax-Free Savings Account (TFSA)

Last year, I decided that I was spending money frivolously when I could be setting some aside. I went to my bank and requested that they automatically deposit $100 each month into my TFSA. At the end of the year, I was able to save $5,200. CRA allowed for $5,000, a number that was increased to $5,500 for this year. The way I look at is that I still have access to my TFSA, penalty-free, but it’s there in the savings account, so why touch it? Calculate how much you think you could spare on a weekly basis – even $10 is better than nothing – and have it automatically set aside. Watching your money grow will inspire you to save more.

Split Your Income

This is an interesting solution to the small business income problem. Hire your spouse or child to work for you and you can redistribute that money, thereby decreasing your overall taxable income, and keeping your money in the family. You should know, though, that you couldn’t pay your spouse or child more than you would pay someone else. So, if you pay Johnny, your neighbour’s son, $15 an hour to stock your shelves, you can’t pay your son $30 to do the same. You must pay your family members a fair and honest wage. CRA will look at your returns closely looking for these types of things.

 Issue Dividends to Fund Your RRSP Contributions

According to TD Canada Trust, you should consider issuing dividends to fund your RRSPs. “Unlike money paid as salary, bonus or commissions, dividends are often paid at a lower tax rate, allowing for a greater year-end RSP contribution. Any tax refund realized as a result of the RSP contribution can be funneled back into investments,” the lender states.

The most important take-home message here is diversify. Experts don’t recommend that you put all of your retirement eggs in one basket, no matter how big the egg and how sturdy the basket.


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