The Best retirement plan for small business owner

Best retirement plan for small business owner: Retirement planning is a long-term task, even for CPAs, who benefit from their training and the knowledge acquired during their career. Your savings goals and strategies change with your age, life stage, and ability to save money.

Deciding when to retire is a top concern. Indeed, a third of Canadians would intend to revise their retirement date because of the pandemic, according to a recent survey by RBC Insurance.

As the owner of a small business or, like many CPAs, an accounting firm, there are some strategies you can employ to solidify your retirement savings plan over time.

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DIVERSIFY YOUR SAVINGS INSTRUMENTS

“Putting all your eggs in one basket, investing everything in your business, or assuming that its value will be enough to finance your retirement, can be a strategy used at the start of the business, to support its growth, but it is not the best long-term option,” warns Debbie Gorsline, FCPA, partner at Anderson Gorsline Chartered Professional Accountants in Calgary.

• “You need to be able to adapt to the unexpected in your life or your business, assess your risks over time and bet on the preservation of capital,” adds the expert.

Working with a financial planner who guided her decisions, Debbie Gorsline enhanced her retirement savings strategy with a Tax-Free Savings Account ( TFSA ), which doubles as an emergency fund, and a Registered Retirement Savings Plan ( RRSP ), which she can take advantage of later. The strategy should also include a risk assessment, she says. If the business or practice is corporately owned, additional planning is required; for example, you might consider paying yourself a salary so that you have a source of earned income to contribute to an RRSP or consider investing in the business.

Kurt Rosentreter, CPA, portfolio manager for Manulife Securities, also believes it's dangerous to depend on a single source of funding for retirement, leaving few options outside of working for the rest of your life or relying on the sale of their business or properties (hopefully mortgage-free) to afford a hassle-free life.

“Diversify your savings by focusing on other investments that will appreciate,” insists the expert. Some of my clients have not done this and find themselves trapped. »

TARGET SAFE INCOME SOURCES AND SAVINGS VEHICLES

According to the RBC Insurance survey, the impact of inflation on savings, spending, and purchasing power is of concern to 78% of Canadians. Some fear that they will run out of savings during their lifetime (48% of respondents) or not have access to a guaranteed income (47% of respondents).

According to Kurt Rosentreter, your retirement planning should start with finding secure sources of income and savings vehicles (for today and tomorrow). “Your business income will vary over time, and so will available funds,” he warns.

“It may seem obvious, but it is important to take the time to determine your assets and your future needs. Take stock of your current net worth by examining your savings history, your investment income, your assets, and your liabilities; you will have a starting point. Next, project when your business income will cease and what income or savings source will replace it. Finally, value these after-tax sources, based on your life stage and projected cost of living. »

• Resource: We're thinking of you: near-retirees, how do you protect your retirement savings?
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"For example, says the expert, plan your retirement strategy taking into account your income and your benefits from the Canada Pension Plan, Old Age Security, RRSPs, TFSAs, annuities, investments held in a company, or other investments (in real estate, for example), depending on your situation; determine when and how you will have access to it. 

Do the same exercise for the person you are in a relationship with, if applicable, and combine your income. It is important to carefully analyze the value of your business as a source of retirement funds. There is a risk: if you are counting on the sale or transfer of your business and it does not materialize, will you be able to retire when you want? »

"It's about making an overall picture of your different sources of income to plan your retirement cash, from today until you turn 100," explains Kurt Rosentreter.

CONSIDER INCORPORATION

The incorporation is an advantageous way to plan for your retirement, especially because of the tax-deferral advantage, which allows you to keep business income in the company after it has been taxed. The company is subject to a lower tax rate (which varies from approximately 9% to 13% depending on the province) on the first $500,000 of taxable profit, and the remaining tax is deferred until paid. dividends to shareholders. 

Note that at the federal level and in provinces other than Ontario and New Brunswick, the small business tax bracket threshold is reduced if the passive income earned in the previous year is greater than $50,000. (and eliminated if passive income is greater than $150,000). If these thresholds are a problem, you can change your savings method and opt for contributions to an RRSP,

“By taking advantage of tax deferral, you have more money working for you in society,” says Aurèle Courcelles, CPA, Assistant Vice President, Tax and Estate Planning at IG Wealth Management. “The longer you can take advantage of this postponement, the better. When you retire, you will have more reserves. »

If you believe that the shares of the company may be sold in the future for a profit eligible for the capital gains deduction, pay particular attention to the accumulation of passive investments in the company, which may affect the 'eligibility.

Finally, if funds are being invested in the business, consider whether to use a holding company. If the holding company owns shares of the company that operates the business, it may be possible to pay regular dividends to the holding company and invest the funds there. This strategy allows you to protect your investments against any risk that could threaten the company.

If your business is a good size, you've probably already incorporated it and are paying yourself an annual salary or will soon. You might also consider an individual pension plan (IPP).

IPPs allow the company to make larger contributions (compared to an RRSP), which provides a greater reserve. However, compared to other options, they have some disadvantages, such as higher fees and potential investment limitations.

Finally, consider gradually withdrawing from the business (by working part-time or receiving dividends as a passive owner) rather than selling the business to a third party right away. For Debbie Gorsline, this is a personal decision that requires careful and ongoing thought on the part of every business owner.

“I am slowly starting to think about the best way to proceed. My partner and I have not made our decision, admits the expert. I know I don't want to work as much at 61 as I did at 54. One of the main advantages of being your boss is being able to organize your transition to retirement. »