When Corinne Contant began her professional career as a dentist 20 years ago she, like many self-employed individuals, found that there were certain years when investing in the growth of her practice needed to take precedence over socking away retirement funds.
But Dr. Contant, who established a registered retirement savings plan at age 26, never lost sight of her retirement needs, and she continued to make regular payments earmarked for her RRSP, as well as to non-registered accounts for retirement purposes, whenever it was feasible to do so.
"It became a regular part of my savings. I told myself, 'That's not my money to touch right now. I'm saving that for retirement,'" she recalls.
Now 47, and with a thriving dental practice in Stoney Creek, Ont., a community in Hamilton, Dr. Contant is able to make regular, annual contributions to her RRSP and non-registered investments as well as to the tax-free savings account (TFSA) since that instrument was introduced in 2009.
"I just automatically put that money away. That way it's saved. I also live a moderate life and don't overspend," Dr. Contant stresses.
Many of the nearly 2.8 million Canadians reported by Statistics Canada as self-employed in 2016 are also wondering how best to fund their retirement planning. They know they won't be able to live totally off the Canada Pension Plan, which pays only up to about $13,370 in 2017 for those who start receiving payments at age 65.
"It's a base income that helps you meet your basic necessities of life, but it's certainly not going to give you a lavish lifestyle," says Aurèle Courcelles, assistant vice-president of tax and estate planning at Investors Group Financial Services Inc. in Winnipeg.
One of the best things a self-employed person can do to prioritize retirement planning is to follow a plan, says Carol Bezaire, the vice-president of tax and estate planning at Mackenzie Financial in Toronto.
"If you're self-employed, it's even more important than if you're working for a company, because you don't have any other benefits. You have to depend on yourself," she adds.
"Just getting into the habit [of] putting something away, even if it's $100 a month – you'd be surprised five years down the road how much money you've got put away. Time is your friend," says Nathan Osterhout, a financial advisor with Edward Jones in Edmonton.
But as Dr. Contant found during the early years of her dental practice, establishing a business places multiple financial demands on entrepreneurs, including competing pressures to place money into the business and to save for personal needs such as retirement.
Small business owners will, for example, lay awake at night worrying about how to pay their staff before they think about paying themselves, Mr. Osterhout says.
"There are life-cycle stages in your business where you're trying to grow the business, then you're trying to maintain the business, and eventually you might be winding it down. So if you're in the growth stage, if you can get a better return on your investments by investing in your corporation, then that might be the way to proceed," Mr. Courcelles notes.
The key is to have a game plan to make up for those years in which retirement planning takes a back seat.
"Your [contribution] room will still be there, and hopefully the investments you've made will make your business more profitable in the future, so you can generate that cash flow to be able to use that contribution room," says Mr. Courcelles.
Some entrepreneurs have argued that they expect the sale of their business will fund 100 per cent of their retirement, and therefore they don't need to worry about setting up registered personal accounts such as RRSPs and TFSAs. This expectation, advisors warn, is fraught with risk. Plans to sell the business can be part of your retirement planning, but don't put all your eggs in one basket.
"If you have your own [personal] investments, you've definitely got something," says Mr. Osterhout.
Moreover, the reality is that some businesses will never be sold. Consulting practices, for instance, are quite often simply folded, because other people are doing the same thing and can build their own practices, says Ms. Bezaire.
One of the key retirement planning questions that self-employed individuals ask, as do others, is whether contributing to an RRSP or a TFSA will be most beneficial to their self-employed lifestyle and business needs.
Contributions to an RRSP generate an up-front tax deduction, which reduces taxes otherwise payable, and might generate a tax refund (one possible strategy for the refund is to invest it in a TFSA, so that both instruments are covered). Investments within the RRSP grow on a tax deferred basis. But when funds are withdrawn – ideally not until later in life, in retirement, when the taxpayer is in a lower marginal tax bracket – they will eventually be taxed on the proceeds.
In contrast, contributions to a TFSA are made with after-tax money. There is no tax deduction when a contribution is made, but also no tax payable when funds are withdrawn. The allowable investments held within a TFSA are essentially the same as in the RRSP, and proceeds grow tax free within the TFSA.
Mr. Courcelles notes that the RRSP offers a much higher potential annual maximum contribution limit. The RRSP limit is 18 per cent of the previous year's earned income up to a maximum of $26,010 in the 2017 taxation year. The TFSA limit this year is $5,500.
"Depending on how profitable your business is, you might be generating a lot more RRSP room than you would TFSA room in a given year," he elaborates. "So if you're looking for the tax deduction with tax deferred growth and a likely lower tax bracket at a future point in time, then the RRSP is probably your favourite."
However, the TFSA may offer some practical advantages to self-employed entrepreneurs and others in certain situations.
"If you're starting out you may want the TFSA for the flexibility. If you need some cash flow or you need an emergency fund, the TFSA is perfect for that," says Ms. Bezaire.
But there is also a danger if TFSA withdrawals become excessive, and the self-employed taxpayer uses it for more than an occasional, emergency source of funds. "If the TFSA is almost too accessible … that's not a good solution. Their retirement plans go up in smoke unless they replenish it relatively quickly," warns Mr. Courcelles.
For some older entrepreneurs with successful, incorporated businesses that provide a high salary, another option might be the Individual Pension Plan (IPP), which is a defined benefit plan set up and funded by the corporation. The IPP provides higher savings limits than an RRSP.
Experts advise that entrepreneurs speak to a financial planner about the potential merits of setting up an IPP, along with all other retirement savings plan strategies.
"If you're working very long hours as a self-employed person, get an advisor to help you. Because when you get too busy, retirement planning can get away on you," says Ms. Bezaire.
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