Retirement Savings Strategies for the CPA Business Owner
Mapping sources of retirement savings and income is essential for small business owners when planning for retirement (Getty Images/Thomas Barwick)
Retirement planning is a work in progress for everyone, even CPAs who benefit from their training and knowledge acquired during their careers. Savings goals and strategies will vary based on age, stage of life and ability to save.
Deciding on when to retire is clearly a priority, with a third of Canadians saying they plan to change their target retirement date due to the pandemic, according to a recent RBC insurance survey.
As a small business owner or, in the case of many CPAs, with an accounting practice, there are strategies that, over time, can strengthen a retirement savings plan.
DIVERSIFY YOUR SAVINGS VEHICLES
Putting all your eggs in one basket – that is, all money invested in your business or assuming the value of your business will fund retirement – can be a strategy when the doors first open to help accelerate business, but it’s not the best long-term option, says Debbie Gorsline, FCPA, partner at Anderson Gorsline Chartered Professional Accountant of Calgary.
“You need to be ready to transition if something unexpected happens to you or your business, assess your risks over time, and focus on capital preservation,” she says.
Working with a financial planner to guide her decisions, Gorsline expanded her retirement savings strategy to include a tax-free savings account (TFSA) — which also acts as an emergency fund — and a registered retirement plan. retirement savings (RRSP) to be used later. Risk assessment should also be part of the strategy, she adds. When the business or practice is held in a corporation, additional planning will be required such as paying you a salary so you have a source of earned income so RRSP contributions can be made or determining if it makes sense to investing at the enterprise level.
Kurt Rosentreter, CPA and portfolio manager at Manulife Securities Inc., also believes it’s dangerous to rely on just one way to fund your retirement, leaving you with few options but working the rest of your life, banking on unique selling of your business. or maybe some real estate you own (hopefully without a mortgage) to go with you.
“Make sure you diversify your savings into other things that will grow,” he says. “I’ve had clients who are effectively trapped because they didn’t.”
MAP SECURE SOURCES OF RETIREMENT SAVINGS AND INCOME
According to the RBC Insurance survey, the impact of inflation on savings, spending and purchasing power worries 78% of Canadians. They are also worried about surviving savings (48%) and having access to a guaranteed income (47%).
Still, establishing secure sources of savings and income (now and in the future) is one of the first steps in developing a retirement plan, says Rosentreter. “Your business income will change over time, and the money funding your expenses will also change,” he says.
It may seem obvious, but it’s important to figure out what you have and what you’ll need in retirement. Establish your starting point by summarizing your current net worth by analyzing historical savings habits, investment returns, and assets versus liabilities, Rosentreter suggests. Then plan when your business income will end and what sources of income or savings will replace it. Then weigh those sources against the projected cost of living, less taxes, based on life stage.
For example, he notes, strategize for your retirement based on when and how you will access (if applicable) Canada Pension Plan (CPP), Old Age Security (OAS) , RRSPs, TFSAs, annuities, investments held in a corporation or other investments (real estate, for example) – depending on what is available to you. Assess the same factors for a spouse or partner, if applicable, and combine them. A key question to consider is how to factor in the value of your business as a source of retirement funds. The concern is risk – if you rely on the business value of a sale or transition and it doesn’t materialize, will you be able to retire when you want?
“It’s a high-level mapping of different sources of income to create a cash flow forecast in retirement, from now until age 100,” says Rosentreter.
REVIEW CONSIDERATIONS FOR INCORPORATED BUSINESSES
Incorporating a business is a great option for retirement planning, especially because of the tax-deferral benefit, which allows business profits to be retained in the corporation after income tax. corporate income. The company is subject to a lower tax rate (between approximately 9% and 13% depending on the province) on the first $500,000 of taxable income, with the remaining tax deferred until dividends are paid to shareholders. Note that the federal small business rate threshold and for provinces other than Ontario and New Brunswick will be reduced if passive income earned in the previous year exceeds $50,000 (and eliminated once passive income exceeds $150,000). Once these passive income thresholds become problematic, you can switch to other methods of saving, such as contributing to an RRSP.
“By deferring taxes, you have more money working for you in society,” says CPA Aurèle Courcelles, assistant vice-president of tax and estate planning at IG Wealth Management. “The longer you can benefit from the postponement, the better. When you reach retirement, you will have a larger reserve of money to draw from.
If you believe that the shares of the corporation may be sold in the future for a gain qualifying for the capital gains exemption, then the accumulation of passive investments at the corporation level should be carefully considered as this may affect eligibility.
Finally, if funds are being invested at the corporate level, consideration should be given to whether using a holding company makes sense. If the holding company owns shares of the company running the business, it may be possible to pay regular dividends to the holding company and invest the funds there. This helps protect investments against any future business risk that may arise.
If your business is large enough, you have incorporated, and you receive or will pay an annual salary from your company, you may also want to consider an Individual Retirement Plan (IPP) to build retirement savings. .
IPPs allow the company to make larger contributions over time (compared to using an RRSP), thus providing a greater reserve of money when withdrawing income in retirement. However, there are disadvantages such as higher fees and potential investment restrictions compared to other savings options.
Finally, consider a gradual exit from the business (by working part-time or being paid by dividends as a passive owner), rather than selling the business to a third party. For Gorsline, this is a personal decision that must be carefully considered over time for every business owner.
“I am slowly starting to think about the best way to proceed. My business partner and I haven’t fixed this 100%,” Gorsline says. “I know I don’t want to work the same way at 61 as I did at 54. That’s one of the biggest benefits of being your own boss, you can transition into retirement.”