A guide to retirement planning for business owners
Taking steps to think about your future income needs in retirement can be more complicated for business owners due to the multiple different areas that they need to consider. Rather than keeping your business and personal future financial needs separate, it is usually better to consider both aspects in conjunction with each other in a holistic manner as it is likely that your objectives in each area can work together to achieve your broader financial retirement goals.
There are a few key sources of retirement income that are of particular worth for small business owners, as follows:
Equity in your business
The equity that exists in your company can be used to help to fund your retirement in different ways. Firstly, selling your business is one option. If you go down this route, it’s worth consulting with a tax professional first to ensure that the sale benefits you from a tax perspective as much as is possible. For example, the sale could benefit from a capital gains exemption if the business meets certain criteria (Source: CRA-Capital Gains Exemption).
Of course, you may prefer not to sell your business and to pass it on to your loved ones instead. You could still receive income in your retirement through dividend-paying preferred shares that you own if you take this option.
Many small business owners also see the benefits of investing in a personal investment portfolio to add to the income that they make from their company. Your choice of investment may differ depending on the type, age, success etc of your own business. For example, you may be happier to take a more risk-oriented approach with your investment portfolio if you own a stable company with solid revenue generation and vice versa if you own a start-up company.
Registered Retirement Savings Plans (RRSPs) can be a valuable investment option for business owners. You can make the most of personal tax deductions on contributions to the plan and your earnings will grow on a tax-deferred basis whilst held within the plan.
Another good option worth considering is a Tax-Free Savings Account (TFSA). You can use it as a means to save for retirement on a tax-free basis as the funds held within it are never subject to tax.
Retirement planning is a key process for small business owners and a written document which details your intentions and goals is a great way to ensure that your plans stay on track. You should also undertake regular reviews to your plan in order to make sure that it still meets your needs and, as part of this, it’s worth consulting with your lawyer, accountant and / or financial advisor.