Joanne Lyttle is a typical small business owner. She devotes 60 to 70 hours a week to her consulting practice, and relies on her assistant to get her financial records to her accountant each month. Once a year, she signs her tax forms. And the only other time she thinks about her financial future is when cash flow gets a little tight.
But at 48, Ms. Lyttle realizes that her 'I-don't-have-time' approach to retirement planning risks leaving her in a very uncomfortable position when she's no longer able to work long hours. As a result, she's finally seeking the help of a certified financial planner to get her back on track.
According to Lee Anne Davies, head, Retirement Strategies, RBC, Ms. Lyttle is far from alone. "Small business owners tend to put all of their money back into their business, at the cost of their personal financial planning. But at some point, a business owner will eventually decide to retire, whether it's forced on them by health (issues) or because they want to scale down."
If they haven't built up personal wealth, but rely solely on the proceeds from the sale of their business, she says, their retirement is at risk.
The introduction of the Tax-Free Savings Account creates an opportunity for business owners to address that gap, she says, noting the account allows you to shelter savings from tax even without a specific level of earned income, as required with RRSP contributions.
Withdrawing money from an RRSP has tax implications, but if business owners find themselves with cash flow challenges, money can be withdrawn from the TFSA without triggering a tax bill. The amount of any withdrawals are added back into contribution room, and contribution room, $5,000 per year, is carried forward if unused. (Like other registered plans, TFSAs can only be opened in the name of an individual, not a business or organization.)
Ms. Lyttle and her generation will be creating their own version of retirement, says certified life and retirement coach Eileen Chadnick, noting that the new retirement is more likely to include "new careers, rekindled interests and new goals."
Financial health, she says, is integral to that equation.
Achieving goals such as starting a new business, attaining higher education or travelling all have financial implications, she says. "A lot of planning is required to make these dreams successful."
A TFSA can also serve as an effective savings vehicle for all of those dreams, creating another means of tax-sheltered savings alongside pension and RRSP savings.
"Conversations about launching businesses after retirement come up quite frequently when we're doing retirement planning," says Ms. Davies, noting she cautions her clients to avoid risking funds slated to support a retirement lifestyle. Instead, she says, "A TFSA can work well for that purpose."
For business owners who plan to sell their venture for retirement, investing in a TFSA can also help develop investment skills that will serve them well in retirement. "If they haven't had a chance to learn how to invest personally, or haven't built a relationship with an advisor they trust, they may be putting their nest egg at risk."
A comprehensive financial plan allows boomer business owners to create the future they desire, using tools such as the TFSA to benefit from tax savings.
"Financial well-being allows people to do what they want to do, to meet their obligations and to have peace of mind," says Ms. Chadnick.
Upsize your dreams with tax-sheltered savings
A recent RBC Financial Priorities Poll found that 76 per cent of Canadians have not yet opened a TFSA, many because they don't fully understand how a TFSA works. "Talking to a financial advisor can help you understand the benefits, find the money to invest and (identify) the investment options that are the best fit for you and your financial goals," says Lee Anne Davies, head, Retirement Strategies, RBC. "When we're talking to our clients, we never start out with a certain type of investment or account, but with an individual or couple; their goals, priorities and time horizons."
Sheltering savings from tax pays significant benefits over time: Assuming a six per cent average annual return and a marginal tax rate of 32 per cent, non-registered savings of $5,000 annually add up to $156,258 over 20 years. But inside of a TFSA, the same savings and returns add up to $194,964, almost $40,000 more.