I have a confession to make to all of you, my faithful readers, and it’s a deeply personal one…
I’m a lifetime chronic saver… but now, for the first time in my life, I’ve gone three whole years without making an RRSP contribution!
It’s slowly killing me inside. Logically, I know it’s the right thing to do, but it takes every fibre of my being not to give in. Every time I think about it, I feel my stress level rising.
My long-time love affair with my RRSP
When I was around 16 or 17, a year or two after working my very first job, my dad pulled me aside, and explained I should start saving for retirement. He marched me to a financial advisor and pretty much forced me to hand over a cheque representing most of what I had left in my bank account for an RRSP account. I had little idea what I was doing, but soon I had a few hundred dollars sitting in an equity investment. I followed my dad’s advice which was “set it and forget it”. At that tender age, retirement seemed an eternity away.
My dad was treasurer for his church for many years, but the fervor with which my dad taught me to save for retirement was extreme. Part of me does wonder if saving money is in fact his true religion. He instilled in me his attitudes towards saving for a rainy day and here I find myself, 30 years later, with a respectable nest egg.
In fact, the amount of my nest egg inside my RRSP is a bit too much. Three years ago, I did some financial planning projections for my own situation and realized that I’m headed towards a pretty whopping tax bill in retirement and in my estate thanks to the amount of saving I’ve done over the last 30 years. I’m pleased to say that up until three years ago, I had never not maximized my RRSP room. And that, my friends, is the blessing and the curse of putting money into your RRSP. Unlike a TFSA, an RRSP is really about tax deferral – not about negating tax. Eventually, we all have to pay the piper with RRSPs.
Like many chronic savers, Bridget and I have relatively few lifestyle costs – except maybe our ridiculously high grocery bill due to feeding three boys who are quickly approaching my height. In retirement, we expect our costs to be substantially lower than now and we aren’t going to need to withdraw very much from our RRSPs to meet our needs.
If I’m not maximizing my RRSP, what will I do?
For my personal situation, first maximizing my TFSA room makes far more sense going forward than adding to my future tax burden within my RRSPs. Additionally, as I am a business owner, I have the capacity to save in my business holdings rather than pay myself extra income that I don’t need.
A privately-owned corporation, like Quiet Legacy, can have an investment account of its own. When I retire, the assets that I have saved in the company can be used to pay myself salary or dividends throughout my retirement. While they may not be as tax efficient as my RRSP, the key difference is because I’m the shareholder, I have total control over the timing and amount to I pay myself. In an RRIF, you eventually have to take a mandated minimum payment – but not so for my corporate shares. That is a very useful and highly flexible situation to be in. I could elect to enjoy a very high income one year or a lower income the next, as needed.
On top of that, I have a participating life insurance policy owned by Quiet Legacy which accrues cash value. In Canada, life Insurance policies can have a cash value component that can be utilized for investment or savings purposes, so long as their values stay below a reasonable growth threshold set by the government. As a business owner, this strategy is useful in multiple ways:
- If something happens to me, the policy will pay its death benefit to my corporation. This will ensure the business has liquidity if I’m suddenly gone, allowing us to wind down or sell. While I hope this doesn’t happen, it’s important we plan for that contingency.
- It allows me to tax-efficiently invest within my corporation while I am alive. While not a true match to the TFSA for tax-planning purposes, it does have enough similarities that I do think of it as my “business TFSA”.
- It creates an asset of the corporation that can be used to secure credit should my corporation require it. Banks can often be reluctant to lend to small businesses without sufficient collateral. The cash value of participating insurance is ideal for this purpose compared to other assets my business might own.
- I have multiple ways to get at the cash inside of it to bring funds into the corporation and eventually into my own income by doing loans or redemptions.
Recent changes to tax laws around small business have made it somewhat less flexible to save money in a corporation than it used to be. But for most of us who own businesses, it still makes more sense (and cents!) to save in our companies than to pay ourselves and then place the funds in an RRSP. If you own a business, I would encourage you to look closely at similar strategies to what I have in place. The insurance strategy that I am using, in particular, has been made more attractive since the most recent small business tax changes went into effect, as life insurance is an exempt asset when calculating reductions to the small-business tax credit system.
Effective planning means a better retirement and less stress
My dad’s tremendous gift of knowledge to me at such a young age has paid off great dividends to my life, and my own financial stability. It’s a debt I am working hard to pay forward to my kids. That said, my dad was a salaried employee his whole life and so my world as a business owner looks a bit different. Therefore, the best way for me to feed my chronic-saving habit looks different as well.
Still, its hard to give up the way I’ve been programmed since the age of 16 to save in my RRSP – even if it’s the right thing to do. Even now, 30 years later, every tax season, Dad calls me to remind me to max out my RRSP. For the fourth year in a row, I’m going to have to gently break his heart and tell him I won’t.
For what its worth, I probably still feel worse than he does about not doing it – even if saving in my corporation and my TFSA is definitely the best strategy for my situation.
Ryan