Canadian Money Forum banner

RRSP as hedge against business failure?

2K views 3 replies 2 participants last post by  Eclectic12 
#1 ·
I'm in Quebec and run a sole proprietorship. Far away from retirement. About $85,000 income in the 2015 tax year. I have around $48000 to invest. No TFSA or RRSP yet.
  • I expect to earn more money in later years, but
  • I'm in an industry based around another company's business. My income could vanish entirely if that company changed policy.

So my main priority is having a short to medium term savings buffer that will give me time to start a new business if my current field vanishes.

So far I'd just been saving that in regular accounts. But it occurred to me that it might make sense to deposit about $12,000 into an RRSP, and put the rest in a TFSA.

1. If business stays good, I just keep it there till retirement.
2. If business vanishes, I can remove it and pay a 0% tax rate by keeping it under the personal exemption
3. I'd then use my TFSA/regular savings for the rest of my living expenses.

Doing this would let me expand the pool of money to draw on in case of crisis. Is this a good strategy?

Notes:
  • I'm aware of the witholding tax. I'd just get that back with the following year's refund. Not an issue since I'd have other savings.
  • Keep in mind that far and away my #1 priority is having enough savings that I could start another business rather than take a job.
 
See less See more
#2 ·
What is the $12K for the RRSP and $35K for the TFSA based on?
What about 50% each then top up the TFSA with the tax refund?

You may want to model what happens to see if there is a more optimal split. Then too, with the 2015 tax return and RRSP contribution deadline approaching - one will not have to wait long for the refund to be put to work in the TFSA.

Then too, where if business stays good to retirement ... you may have opportunities to time the RRSP withdrawals so that the future income tax paid has fewer other sources of income to drive up the tax rate.


It looks fine as a strategy to have assets to draw on (as well as keep the withdrawal tax rates to a low income period).


I'm not sure how well it works for "enough savings to start another business". Down the road, the TFSA + RRSP growth, in combination with additional contribution room granted might get it high enough but in the short term, depending on how much is needed - it may not work that well for the RRSP portion.


Just my thoughts ...


Cheers
 
#3 ·
What I meant was that, sometimes in the next 2-5 years, it's possible my current business' industry may vanish or change radically.

In which case I'd like to have 1-2 years living expenses so I can start another business. I really, really, really don't want to be an employee. I never have been one and strongly dislike the idea.

The $35,000 + 12,000K RRSP is just based on my current savings. If I put 12,000 in an RRSP, I'd have $35,000 to put in a TFSA. If I don't contribute anything to an RRSP, I'll have about $43,000 to put in a TFSA instead.

However, my reason for wanting to put some in the RRSP is that, if I experience business failure in the next 2-5 years, I'd be able to draw on that RRSP at a very low tax rate. A good chunk would be withdrawn at 0% due to the personal exemption. So effectively I'd have a larger total amount of savings to draw on as capital in that 2-5 year span if I needed working capital for a new business.

I of course hope to never have to actually do that –*but it would be helpful to have it there as an insurance policy.

Also, I'm about 3K into a higher tax bracket, so I should at least put that much in. I'm less sure if I should put RRSP money in beyond that.
 
#4 ·
One of my points is that the new business may require far more capital than the "live off the TFSA which allows low to zero tax rate withdrawals". So unless the "no tax withdrawal of $12K" is enough to get the new business up and running, it may be moot.

Where one needs more to fund the business, maybe more in the RRSP can help. It is a balancing act as one needs the TFSA $$$ to live and there is a cap on how much can be zero tax then low tax for the RRSP withdrawal.


Of course if it is three years down the road where one's investments have done well, that will change the numbers as well as the possibilities.



Cheers
 
This is an older thread, you may not receive a response, and could be reviving an old thread. Please consider creating a new thread.
Top