How Can Self-Employed People Save for Retirement in Canada

If you’re self-employed in Canada, you know that the many perks of entrepreneurship come with some challenges unique to being your own boss, including funding your own retirement. With an unpredictable income stream or a lack of clear direction on navigating saving for your future, it can be daunting to ensure all your bases are covered. Failure to save enough while you work may mean you don't retire with enough savings. Worse, maybe you won't be able to retire when you want.

As a self-employed, you’ll receive no help from anyone but yourself when it comes to planning for your golden years. A big part of the puzzle is figuring out how to do things on your own—and understanding how to save for retirement when self-employed is an incredibly important piece.  If this sounds familiar, don’t worry!

We will discuss strategies and practical advice specifically crafted for self-employed professionals so that you get everything you need to gain control over your financial future and start leveraging savings opportunities right away.

When Should You Begin to Save for Retirement?

When first starting, self-employed workers rarely make saving for retirement a priority. You are instead focused on just surviving until the next day and are counting on growth over the medium term. However, it is critical to start saving as soon as possible. Even once your business is set up and you're well established, each year counts, and even small amounts set aside regularly can make all the difference.

Understand What Retirement Savings Options Are Available to You

Understanding the retirement savings options available to you is critical to making the best decisions when preparing for your future. Make sure you familiarize yourself with popular accounts, such as RRSP and TFSA, and it’s essential that the money going into these accounts is invested very well so that it can grow as quickly as possible. Both play an important role in helping you get prepared for retirement, so plan on participating in both.

The RRSP helps you save money on personal taxes today (you pay these taxes upon withdrawing money in retirement), and the TFSA is funded with after-tax dollars today, which means you save money on taxes down the road. You see, they both function to help save you taxes, it’s just that they approach it from different timelines, offering unique advantages that make both accounts helpful.

Depending on how much you’re paying yourself personally from your business, it could make sense to prioritize more savings to one of the accounts over the other. Each plan has limits on how much money can be contributed. As well, you can put a variety of investments within the RRSP and TFSA, from GICs to stocks to ETFs to mutual funds. Your contribution room is also carried forward indefinitely, so if you can’t contribute one year, you can make up for it the next year.

The goal, however, is to fund these accounts as much as you can annually so that your carry-forward room doesn’t get too massive. Once the RRSP and TFSA are maxed out, it often makes sense to open a non-registered investment account and start adding money to that.

The specific amount of money going into each account should be planned out with your accountant.

Get the Most Out of Your Tax Breaks and Deductions You're Entitled To

Being aware of available savings can be a big help when setting aside money for the future. You may have taken advantage of various tax deductions and credits while you were working. Now it’s time to pay close attention to those that apply to retirees. With some strategic planning and research, you can ensure your retirement savings are appropriately allocated and that you're taking full advantage of every opportunity. You can save more on your provincial or territorial return, depending on which province or territory you live in. Other potential tax savings include:

  • the age amounts.
  • the home accessibility tax credit
  • the medical expense tax credit
  • the disability tax credit

An accountant can help you navigate the long list of allowable federal tax credits and deductions.

Consistency is Key to Stable and Beneficial Retirement Plan

A super common money characteristic among self-made millionaire entrepreneurs is consistency. Contributions can be automated at a pace that works for you; monthly, biweekly, weekly. And, as all entrepreneurs know, as cash flow to your business changes, you can change these automations to suit what you can afford, and/or make extra lump sum contributions in the instance you have a really good streak of cash flow and want to capitalize on that excess money. It is advised though that no matter the cash flow, try to make consistent contributions even if they have to be smaller for a while.

How Much Should You Save for a Retirement Plan?

The exact amount you should save depends on your specific financial situation, but a good target to aim for is putting 20-25 percent of your income toward your retirement savings. If that just isn’t feasible based on the other expenses in your life, a smaller contribution is still better than no contribution at all.

How Can You Successfully Manage Your Small Business While Planning for Retirement?

Managing a business can feel like more than a full-time job. You’re never really off the clock, and everything that comes up in the business is ultimately your responsibility. Planning for retirement is probably the last thing on your to-do list most days because you have so many other more urgent concerns.

To avoid a situation where you neglect your retirement for too long and find yourself having to keep working when you’d like to retire, it’s important to create a system that takes thinking about your retirement off your plate. Here’s how:

1. Leave it to the experts

Like many other aspects of business, it’s helpful to know when to dedicate tasks to others so that you can focus on your strengths. Speaking to an accountant can help you come up with a plan that makes the most sense for your financial situation.

2. Automate your contributions

If you can set up automatic monthly contributions to your savings account, you can take your mind off of your retirement completely most of the time, while knowing you’re still doing the responsible thing. Establishing an annual savings goal based on anticipated income is also a great way to set up retirement savings within your company's financial structure. The more you can automate tasks in your business, the more mental space you can free up.

Make Retirement Savings a Priority — Set Aside Money Each Month

It may be challenging to commit to setting aside money every month to ensure security. Fortunately, there are specific strategies self-employed people can employ to manage their finances and plan for a comfortable retirement. An essential method is creating a budget with a designated savings account dedicated solely to retirement.

Self-employed people should consider investing in an Individual Retirement Account. With some strategic thinking and effort, any entrepreneur who owns their own business can save for a secure future.

The Pitfalls to Avoid Making Saving for Retirement Easier

Finding the time to manage your investments and savings yourself is of course a challenge when you need to devote most of your energy to running and building your business. Aside from ignoring the importance of saving for retirement altogether, some other common pitfalls regularly hurt self-employed Canadians when it comes to their retirement.

1. Not factoring in taxes

Make sure you understand how your various streams of retirement income will be taxed. For example, many don’t realize their CPP payouts are taxable. TFSA withdrawals, on the other hand, are tax-free.

2. Not getting insurance

Unexpected expenses you don’t have proper coverage for can cause you to draw from your retirement savings long before you planned to. For example, an unexpected disability can restrict your ability to work and earn an income. Health insurance and disability insurance are well worth considering.

3. Re-investing all profits into your business.

Relying solely on your business and investments to save for retirement carries inherent risk. Your company is a relatively fragile business vehicle. A lawsuit or an accident could wipe out all your savings. Putting all your retirement eggs in your business basket is highly risky, it’s tempting to invest as much of your income back into your business as possible, especially when you’re just starting and trying to grow your business. When business is going well, it can feel like a better investment to grow the business rather than contribute to a retirement savings account you won’t get to use for years. However, the future is always uncertain, and even phenomenally successful businesses can take a turn. Don’t fall into the common pitfall of expecting to be able to live off of your business profits forever.

Choosing the Right Plan - Or Combination of Plans

So which plan or combination of plans is right for you? It depends. As with all financial decisions, the answer is based in large part on your personal needs and objectives. The total amount required for your retirement is going to be dependent on the kind of lifestyle you want to lead in your golden years. An accountant can help you put super concrete numbers behind this vision.

These are just some of the options available for anyone trying to save for retirement. A well-crafted tax strategy can help ensure your money lasts as long as you need it. For retirement income management advice that will work for your unique resources and goals, feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances and ensure you comply with CRA reporting and payroll deductions.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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