Entrepreneurs prepare with RRSP savings
Winter 2005
If RRSP contributions are any indication, small business owners are better prepared than most for retirement. According to the 2004 CIBC report Canadian Entrepreneurs and Retirement, more than two-thirds (70%) of entrepreneurs have a registered retirement savings plan (RRSP), compared with 55% of paid employees. Entrepreneurs also contribute about 50% more to their RRSPS than their employed counterparts without a pension plan.
Clearly, many small business owners bring the same careful forward planning to their retirement objectives as they do to their business objectives. With that in mind, these strategies have the potential to enhance the performance of your RRSP.
Contributing the maximum. You can contribute up to 18% of your previous year's earned income to a maximum of $19,000 (less any pension adjustment) for the 2007 taxation year, rising to $20,000 in 2008 and $21,000 in 2009. To reach the maximum $19,000 contribution limit for 2007, you would need to have earned income of $105,556 in 2006 (that is, $105,556 x 18% = $19,000). Earned income can include salary you received from your company or net business income you earned from your unincorporated business. Unused RRSP contribution room from prior years and pension adjustment reversal can increase the maximum amount you can contribute to your RRSP. Remember, you have until February 29, 2008, to make your contribution for the 2007 tax year.
Diversifying. Whether you're investing inside or outside a registered plan, diversification remains one of the most effective ways to improve potential performance and decrease volatility. In addition to being diversified across the three main asset classes (cash, fixed income, and equities), you may want to diversify geographically.
Income splitting with your family. If you run a family business, you can pay your spouse and children a reasonable salary for duties they perform in the business. This earned income, which is usually tax-deductible for your business, may generate contribution room for their own RRSPs (keeping in mind their pension adjustment, if any). Even if your children are still in their teens, and don't have an RRSP, the accumulated contribution room can be carried forward into their adult years and used to reduce taxes.
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The information in this article is believed to be accurate at the time of publishing; CIBC is not liable for any errors or omissions. This article is intended to provide general information and should not be construed as specific legal or tax advice. Individual circumstances and current events are critical to sound planning; anyone wishing to act on this article is best instructed to consult his/her CIBC business advisor.
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