Build Your Own Pension
This week’s guest experts are Matt Redshaw, Portfolio Manager, Raymond James Ltd., and Jacqueline Knoblauch, Insurance Planning Specialist, Raymond James Financial Planning.
As a business owner, you may not have a gold-plated pension plan that often comes with a more secure job – such as being a teacher or government employee.
Thankfully, you have some tools in your toolbox that most employees don’t have.
With some planning, you can create a secure and enjoyable retirement – in effect, you can build your own pension. In other words, you can create your own dependable sources of retirement income.
The first step is to determine how much you need to put aside each year to meet your future lifestyle goals in retirement. This is best done with a qualified financial advisor, although there are some great tools online to get you started.
The next step is to identify which vehicles are best for you given your unique circumstances. Then you can start building your plan.
Here are some of the tools to consider:
Invest Inside Your Corporation
When you invest inside your company you defer tax into the future. Your corporate profits up to $500,000 are taxed today at 11% and then 27% on income above $500,000 (using BC corporate tax rates). These tax rates are much lower than if you take this money out of the company personally. You can invest up to 89 cents on every dollar you earn in the company (assuming 11% active business tax).
Those “89 cent dollars” grow year after year in your company. In contrast, if you were to pull those funds out of the company as salary, you could lose as much as 53.5% in personal tax (this tax rate kicks in at $227,091 of personal income in 2022). That leaves you with “46.5 cent dollars” to invest. Therefore, the key advantage of investing in your corporation is that you can invest the full “89 cents” and let it grow for years and decades to come.
Another benefit is flexibility. You can buy stocks, real estate, other businesses and alternative investments in your corporation. You can also control when that money eventually comes out of the company. Make sure you are utilizing tax efficient investments in your corporation, because tax on income from investments (passive income tax) is significantly higher than active income. Again, a qualified financial advisor can help with this.
Create an Individual Pension Plan (IPP) in Your Corporation
As a business owner, your company can create an official, registered pension plan with you as the beneficiary (you can also include key staff). This is called an Individual Pension Plan (IPP). The main benefit of an IPP is that in many cases it allows you to contribute much more towards your retirement than you could through an RRSP. Contributions are tax deductible to your corporation. There other benefits, such as tax-deferred growth and a high level of creditor protection.
Build up Your RRSPs and TFSAs
Registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) often form a key part of a business owner’s “pension” plan for the future. Contributing to RRSPs makes sense when your personal income today is high in comparison to your expected income in retirement.
This is because you want to get a high tax refund for contributing today, and ideally pay less tax when you pull that money back out in retirement. TFSAs make sense for most people. While they do not offer a tax deduction when you contribute, TFSAs grow tax free for life and eventually pay out to your beneficiaries completely tax-free. In this sense TFSAs are an ideal retirement and estate planning tool.
Utilize Tax-Exempt Life Insurance in Your Corporation
Often thought of only for mortgage protection or for those with families, cash value life insurance is a highly tax efficient tool to accumulate wealth for retirement. Cash value life insurance has a death benefit like a regular insurance policy, but there is also an investment (cash value) component.
If purchased inside your company, premiums can be paid with “pre-personal-tax” dollars (think of those 89 cent dollars referenced above). A portion of those premiums grow in a tax-exempt environment which generates investment value (cash value) over time. The policy owner has the option to tax-efficiently meet retirement income needs by borrowing against the policy, or to let the policy to continue to grow tax-exempt until life expectancy.
Upon death, a large portion of the policy flows out of the company tax free to beneficiaries. Utilizing these types of contracts has become increasing popular among business owners as tax rates continue to climb and tax saving measures continue to be reduced.
While you may not have a gold-plated pension plan from a government job, you can build your own pension. Just follow these steps:
- Define your retirement goals and income needs in the future.
- Figure out how much you need to save each year to meet those goals.
- Then start using the right tools for your unique situation to build a reliable income stream for retirement.
If you have any questions about your unique situation and goals, don’t hesitate to contact your team at Avisar or Matt Redshaw at Raymond James.
Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
