Strategy 2: Torn Between Two Lovers:
TFSA or RRSP
Even though they are sophisticated business people, many of my clients ask me whether they should invest in a Tax Free Savings Account or in a Registered Retirement Savings Plan. We often have to decide between options.
When I ran my language schools, every year different opportunities presented themselves and I had to figure out which one(s) to take advantage of and which one(s) to pass on. In your business, I am sure there are always options to consider. For example:
• offering Service A or Service B
• launching Product A or B according to the trends and/or the season
• opening location A or B … or waiting until next year to make a move
• hiring staff, e. g., do the recent changes to EI make it worth your while to hire more personnel, or are those extra staff going to take your payroll too high to benefit from the reduction in EI premiums?
Does the opportunity offer a short-term or long-term gain? While business moves quickly and you probably have a hunch or an instinct as to your next step, please take enough time to evaluate the pros and cons of each choice, and seek expert advice to assist in your decision. A business coach, or a formal or informal board of directors are great assets to entrepreneurs.
As for investment choices, there are many factors to consider when choosing between a TFSA or RRSP. TFSAs are more flexible because you can withdraw money from your account and redeposit it the next year without any penalty. However, that might not make them the best vehicle for saving for retirement as you need discipline to leave the money in your TFSA.
If you withdraw funds from your RRSP, however, you will have to pay tax right away on the withdrawal, and you will lose the contribution room going forward. (Some exceptions apply, for example, the Home Buyers Plan). Those penalties encourage us to leave the funds in the RRSP which means that less discipline on our part is required.
Other factors to consider when deciding between the two investment choices, TFSA or RRSP, are income and taxation in retirement. The generally accepted principle is that if you expect to have a much lower income in retirement, then RRSPs make sense while the opposite is true for TFSAs –a modest income now and later makes a TFSA preferable.
Let’s talk in person about how to the most appropriate savings vehicle for your personal situation.
Just good advice.
Watch for “For Sale by Owner” for tips on what to do to get top dollar when you are selling your business.