Saving for Retirement: TFSA vs. RRSP for Business Owners

If you’re self-employed or a small business owner, planning for retirement can be challenging. Here are some common issues you might face:

1. No Employer Savings Plan: Unlike employees, you don’t have access to an employer-funded retirement plan.
2. Reinvesting in Your Business: You may be putting all your money back into your business instead of saving for retirement.
3. Focus on Growth: You’re likely focused on growing your business and saving for retirement might not be a priority right now.

Even with these challenges, there are simple steps you can take to improve your retirement savings.

TFSA vs. RRSP: Which is Better?

Are you investing in a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP)? If not, you might be missing out on tax benefits. But which one should you choose?

The best answer is to use both if possible. Maximizing contributions to both accounts is ideal. However, the right choice depends on your tax bracket and when you plan to use the money.

Both TFSA and RRSP are popular in Canada and offer different benefits. The main difference is the timing of the tax advantages.

Should You Contribute to an RRSP?

An RRSP allows you to defer taxes. Contributions are tax-deductible, giving you immediate tax relief and allowing your investments to grow tax-free. You’ll pay taxes when you withdraw the money, ideally when your income—and therefore your tax rate—is lower.

Contribution Limits:

• Your RRSP deduction limit for 2024 is 18% of your 2023 income, up to $31,560.
• You can carry forward any unused contribution room from previous years.

Age Limit:

• You must withdraw from or convert your RRSP to a Registered Retirement Income Fund (RRIF) by December 31 of the year you turn 71.

Spousal RRSP:

• You can contribute to a spousal RRSP to balance retirement savings if your spouse earns less. This helps reduce taxes when your spouse withdraws the money at their lower tax rate.

Should You Contribute to a TFSA?

TFSAs don’t offer immediate tax deductions, but your investments grow tax-free, and you don’t pay taxes on withdrawals.

• Investments: TFSAs can hold a variety of investments, including stocks, bonds, and mutual funds.
• Contribution Room: You gain TFSA contribution room each year, regardless of income or tax filings. Withdrawals also free up additional contribution room.

Contribution Limits:

• For 2024, the contribution limit is $7,000, with additional room for unused contributions from previous years. The annual dollar limit is indexed to inflation.

Over-Contribution Penalties:

• Exceeding your TFSA limit results in a 1% monthly penalty on the excess amount.

Choosing Between TFSA and RRSP

Consider these questions when deciding:

1. Current Tax Bracket: Are you in a high tax bracket now?
2. Future Tax Bracket: What will your tax bracket be in retirement?
3. Timeframe for Funds: Do you need the money before retirement?
4. Impact on Benefits: Will withdrawals affect benefits like Old Age Security (OAS)?

Scenarios:

• Income Under $50,000: Use a TFSA first, as further reducing your taxable income does not lower your tax rate.
• Income Between $50,000-$98,000: Contribute to both RRSP and TFSA until your TFSA is maxed.
• Income Over $98,000: Focus on an RRSP to reduce your taxable income significantly.

Employer Contributions:

• Maximize employer-matching contributions before considering additional TFSA savings.

Flexibility:

• TFSAs offer more flexibility for early withdrawals without tax consequences.

Conclusion

There is no one-size-fits-all answer when it comes to choosing between a TFSA and an RRSP. This guide provides a general outline to help you decide which option may be best for you. However, it’s important to speak with a financial planner to tailor your strategy to your specific situation. Consider purchasing “The Art of Retirement” for more in-depth insights and guidance on building a secure financial future.