RRSP Quick Tip #1:Don’t make an RRSP contribution!

Tuesday, April 10, 2018

On this blog post I am expanding on an update that I made on LinkedIn regarding RRSP contributions for business owners. Here is the original message:

"BUSINESS OWNERS: RRSP Quick Tip #1: DON'T get one! That's right (but not for everyone). 
Leave the money in your corporation. You'll end up paying less taxes in the long run and have more money for your retirement.  

"But my banker told me…". Screw your banker. He/she and the bank just want your money. This is a good strategy if you're active business income is below $500,000 and  you provide services (consulting, marketing, internet…). Not good if your business can be sold in the future.  Be sure to ask your advisor/accountant to run the numbers or ask me anytime!"

Banks tell us to make RRSP contributions every year. This simplistic view is typical of the advice your advisor will give you because they get fat commissions (trust me, I know). Here are a few benefits of not making an RRSP contribution:

  • To make an RRSP contribution you need to earn employee income. If you don't make an RRSP contribution you don't need to take a salary. You can take dividends instead to cover your personal costs. This way you don't pay personal income taxes, and will not have employment premiums to pay. Lots of savings here. Your company will not get a tax deduction for employee salaries but this deduction is usually outweighed by the tax savings of not taking a salary and future tax savings when you retire.
  • More flexibility when you retire. When you reach the age of 71, the government forces you to take out money from your RRSP (subsequently called a RRIF at age 71) even if you don't need it.  Big taxes to pay here.Furthermore, it will be taxed as salary when you take it out. When you keep the money in your company instead of in an RRSP, you decide how much and when to take it.This could result in significant tax savings.
  • There are other vehicles like IPPs and RCAs (don't worry about what they mean for now) that you can use instead of RRSPs which allow you to contribute much more than the limit that you have for RRSPs. Ask your advisors about this.
  • And many more…

There may be some negatives like a lower pension from the Quebec pension plan and losing some tax refunds and deductions but if the money is invested in a conservative way you can end up with MUCH more money in your pocket to retire and paying substantially less taxes.

 My first investment would be to put as much money as I can into a TFSA .

However, every situation is different and everyone has different needs. Do not do this before you examine your situation with your investment advisor AND your accountant (these two should be meeting together with you at least once a year). I've also noticed in the past that other strategies may also be uncovered to save more taxes by meeting frequently.

I'll gladly answer any questions you may have at:

Also be sure to get t my latest Consumer Aware Guide: "The 6 Questions Business Owners Must Ask A Financial Planner Before Hiring One."which you can pick up for FREE at: https://meritfinancialplanning.leadpages.co/the-6-questions-landing-page/?platform=hootsuite

Have a great day.

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One thought on “RRSP Quick Tip #1:Don’t make an RRSP contribution!

  1. Margaret Jimas on said:

    I invested in RRSPs for retirement and have $140,000.00
    which is now a RRIF. I also have $68,000. in TFSA and approximately $100,000. in savings. This is not going to sustain me in retirement in the event I live another 20 years. Unfortunately I am not financially able to retire and continue to work part time as a nurse at age 74. I had to start receiving monthly RRIF payments at 71. Now I receive CPP and OAS (which has been clawed back $300. monthly) and my small pension from work. I have put myself into a serious situation. My Annual salary, plus pension amounts to approximately $80,000. and as a result I am paying $20,000.00 in taxes annually. Without my employment income, I will have approximately $30,000. annually and no medical or dental plans. This is not sufficient to survive. I have made such mistakes. Do you see any way I could improve on my situation? I cannot continue to work at my age, but do not know what the answer is. I have 0 debt and own my condo worth approximately $150,000.

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