RRSPs are Key to Retirement for Small Business Owners, Says BMO

* Relying on the income generated from selling business a risky approach
* BMO survey found 13 per cent of small business owners don’t know if the value of their business has changed since the recession
* RRSP can help reduced taxable income for entrepreneurs

TORONTO - While many entrepreneurs count the value of their business as a key component of personal net worth and a significant contributor to retirement income, it’s also essential to establish a Registered Retirement Savings Plan (RRSP) and to maximize contributions to it.

“Many small business owners rely on the sale of their business to fund their retirement, which can be a risky approach if you can’t sell for the price you need or you are forced to step away from the business sooner than you planned,” said Gail Cocker, Senior Vice-President, BMO Commercial Banking. “It’s important for business owners to look at the bigger picture and have a diversified financial plan that also includes an RRSP.”

A BMO survey found that 13 per cent of small business owners in Canada don’t know how the value of their business may have changed since the recession. A varied approach to planning, including an RRSP, can help entrepreneurs ensure a secure retirement income.

There are a number of reasons why small business owners should consider an RRSP:

Diversification. By contributing to an RRSP, you establish a source of income independent from your business. In the event that the sale of your business doesn’t provide the capital you need, you can count on your RRSP to provide you with retirement income.

Tax benefits. Every dollar you contribute to an RRSP reduces your taxable income for the year of contribution. Within the plan, the tax on investment income is deferred until the year of withdrawal. Over the long term, the power of tax-deferred compound growth is substantial.

Security. As a business owner, you know that your business can be affected by factors beyond your control — such as an economic downturn. An RRSP that holds conservative investments such as Guaranteed Investment Certificates (GICs), government bonds or Treasury bills is an effective way to offset the volatility of your business returns.

Flexibility. The primary goal of an RRSP is retirement savings, but it can also be used for other purposes. For example, under the Home Buyers’ Plan you and your spouse can withdraw up to $25,000 each tax-free from your RRSPs to use as a down payment on your first home. You have to pay the money back, but your first payment isn’t due until two years after the year of withdrawal. Under the Lifelong Learning Plan, you can withdraw RRSP funds to pay for education for yourself or your spousal partner.

Bargaining power. With the strength of your RRSP behind you, you’re in a better position to hold out until you find the right buyer for your business.

Protection. If you or your spouse experience unexpected health problems later in life, you might need to exit your business sooner than you had planned — perhaps at an unfavourable time to sell. With the resource of your RRSP, you’d be in a better position to still achieve your desired retirement lifestyle.

Reliability. At any time, you can convert your RRSP to an annuity that will provide you with guaranteed income for life. You must convert your RRSP to an annuity or Registered Retirement Income Fund (RRIF) by the end of the year you turn 71.