RRSP Contribution Deadlines Are Here: What Entrepreneurs Need to Know

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Every year around this time, business owners are presented with an important financial opportunity: the ability to contribute to a registered retirement savings plan for the previous tax year—in this case, the 2023 tax year—with an 18 percent contribution limit. your prior year earnings are limited to $30,780.

Even if you can't take full advantage of it right away, February 29th is an important deadline for business owners with self-employment income or a filed T4 return. Either way, it's always a good idea to learn how to use it effectively and plan ahead. Let's dive in.

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Understanding RRSPs

RRSPs are the cornerstone of retirement planning in Canada, offering a tax-deferred way to save for your future. This is especially important for self-reliant business owners who, unlike a corporate or government employee with a retirement plan, must navigate current business cash flow and post-exit financial stability.

Going one step further, this business structure makes planning for a sustainable private retirement essential for those who cannot generate enough third-party sales to pay for living after work.

The amount you contribute to your RRSP is deducted from your taxable income, which may put you in a lower tax bracket. Remember that the exact amount you can enter is detailed in your personal tax assessment notice.

3 benefits for business owners

Tax reduction: Contributing to an RRSP before the deadline is an effective way to reduce your taxable income for the year. Especially for business owners whose incomes may fluctuate, this can result in significant tax savings.

Successful smoothing: The flexibility of an RRSP allows you to contribute more in high-income years and roll over unused contribution room to years when you may have low income. This income smoothing can optimize your tax situation for several years.

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Compound Growth: RRSPs offer the advantage of tax-deferred growth. This means that any investment earnings in your RRSP are not taxed as long as they remain in the plan. Over time, this compounding effect can significantly increase your exit payment, which is your retirement savings payout.

Why contributing is important now

Even if you haven't contributed consistently throughout the year, making some (however modest) contributions before the deadline can help. Here's why:

Immediate tax benefits: Contributions made before the due date can be deducted from your personal taxable income for 2023, providing immediate tax relief.

Last minute deposits are calculated for compound growth: Even last-minute contributions can make a big difference in lowering your tax bill and boosting your retirement savings in the long run.

3 ways to increase your contribution

Assess your finances: Review your financial situation to determine how much you can contribute. Remember, it's not just about maxing out, it's about what makes sense for your current financial situation. Even small amounts count.

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Plan for the future: While it's important to focus on the immediate tax year, as a business owner, consider your long-term, post-exit income and wealth accumulation goals. RRSPs are a marathon, not a sprint; consistent, thoughtful contributions will serve you better in the long run.

Seek professional advice: Given the complexity of tax planning and retirement savings, it may be helpful to consult with a financial advisor and your accountant. Together, they can help you tailor your RRSP strategy to your unique business and personal financial situation.

Outside of RRSPs

For business owners with T4 income over $100,000 and over 40 years of age, individual pension plans (IPPs) offer another level of retirement planning. Although outside the scope of this article's RRSP term, it's worth noting that IPPs can provide higher contribution limits and additional tax benefits.

Making the most of your RRSP contribution before the due date is a smart and strategic financial move. It offers immediate tax benefits and paves the way for a more secure financial future. So review your finances, understand your contribution limits, and if you don't already know, take this opportunity to invest in your future. Remember, every contribution counts in the world of retirement planning, and the best time to act is now.

Colleen O'Connell-Campbell – RBC Dominion Securities Inc. is a wealth advisor and creator of the Cash-Rich Exit podcast.

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