This article was reviewed by Chris Singer, CFP®.
For entrepreneurs, retirement is something you build for yourself, just as you built your business. After years of establishing and reinvesting in your business, the idea of stepping away and creating a stable, tax-efficient retirement income can feel overwhelming. That’s understandable, but with careful planning, you can turn all those years of hard work into a comfortable retirement. There are a few unique challenges for entrepreneurs you need to consider:
- Your money may be tied up in your business
- Your income can be volatile, fluctuating from year to year
- You are accustomed to having more discretionary spending
- Your income will be more fixed in retirement
While your financial landscape may be different from those who are employed, you also have unique opportunities to set yourself up for a fulfilling retirement. From registered accounts to advanced corporate strategies, there are powerful tools available to help you retire confidently.
Traditional Investment Accounts
Don’t overlook traditional registered accounts like RRSPs and TFSAs. These aren’t just tools for employees—they can be powerful vehicles for entrepreneurs as well. It could be wise to maximize your annual contributions to both of these registered accounts—this is something we look at with each of our clients to ensure that it makes sense based on their income strategy that their accountant has planned for them. Let’s look at how each can benefit entrepreneurs specifically:
RRSP
- Allows you to defer tax while you’re in a high-income bracket, then withdraw in retirement when your taxable income is likely to be lower.
- Can significantly reduce your lifetime tax bill.
- Can help smooth your cash flow in the years after you exit your business.
TFSA
- Every dollar of growth, whether from interest, dividends, or capital gains, is completely tax-free.
- Since TFSA withdrawals don’t count as income, they won’t affect eligibility for government benefits (OAS) or bump you into a higher tax bracket.
As you can see, these tried-and-true registered accounts can be as beneficial for entrepreneurs as they are for employed persons. For early entrepreneurs—or during hardship years, regardless of business age—it may be a challenge to fully maximize your contribution limits each year, but this is a great starting point for every business owner.
Corporate Savings
While RRSPs and TFSAs can be effective for saving for retirement, most successful entrepreneurs use corporate savings for building their wealth. However, corporate savings is also the most misunderstood method so it’s best to speak with your financial advisors prior to moving forward with this method. Using a holding company is especially common among business owners who want to separate their investments from their operating company. By funneling profits or proceeds from a business sale into a holding company, entrepreneurs can save and invest in a way that’s fairly tax-efficient and tailored to their long-term goals.
A holding company functions similarly to a personal non-registered investment account, but with corporate tax considerations. It allows you to grow your money through various investments, provided you’re mindful of the types of assets you choose and how they’re taxed within a corporation. While some entrepreneurs might also incorporate a family trust for more complex planning, using a holding company alone can still be a powerful retirement strategy.
The big advantage? You can defer personal taxes by keeping your savings inside the corporation, allowing your investments to compound more efficiently. Then, when you retire—or after you sell your business—you can gradually withdraw the money as personal income, often at a lower tax rate. It’s a smart way to keep more of what you’ve earned and take control of your retirement future.
Registered Plans Specific for Entrepreneurs
In Canada, there are two additional investment options for entrepreneurs to take advantage of when saving for their retirement: the Individualized Pension Plan (IPP) and the Corporate Insured Retirement Plan (CIRP). While these strategies are available and used, they are not something we see regularly, as most entrepreneurs opt for Corporate Savings. However, in the interest of providing you with a broad range of options, we wanted to include the IPP and CIRP as well, so you and your financial advisor can decide on the best strategy for you.
Individual Pension Plan (IPP)
- For incorporated entrepreneurs, this is a defined benefit pension plan funded by your corporation.
- Allows for larger annual contributions than an RRSP, and contributions are tax-deductible to the corporation.
- As an added layer of security, it offers strong creditor protection.
Corporate Insured Retirement Plan (CIRP)
- Uses your corporation to fund a permanent life insurance policy, which builds cash value over time.
- The corporation can then borrow against that policy in retirement, providing tax-free cash flow while preserving the death benefit for your estate or beneficiaries.
To help you determine which option(s) is best for you, your business, and your specific retirement goals, it’s best to speak with a financial advisor who can help set you up for long-term success.
Using The Sale of Your Business
The sale of your business, if handled strategically, can be the foundation of a long-term, tax-efficient retirement income plan. First, it’s important to explore whether your business qualifies for the Lifetime Capital Gains Exemption (LCGE), which can shelter up to $1,016,836 (2024 limit) of gains from tax when selling shares of a qualifying Canadian-controlled private corporation. This exemption can be multiplied if shares are held through a family trust, which can greatly impact your wealth preservation.
Once the sale is complete, how you receive and manage those proceeds matters. Instead of taking a lump sum, you may want to structure the deal with installment payments, an earnout, or a vendor take-back loan—talk to your financial advisor as to which option is best for you. This spreads out income over multiple years and reduces the tax hit in any one year. You can then reinvest the proceeds through a holding company or personally, building a diversified portfolio of investments that aligns with your income needs, risk tolerance, and legacy goals. The key is treating the sale not as a finish line, but as the beginning of a carefully crafted retirement strategy.
Summary
Retirement planning as an entrepreneur isn’t one-size-fits-all, but with the right strategy, you can set yourself up for a very fulfilling retirement. As a business owner there are many moving pieces and the larger the empire you have built, the more planning you will require to ensure your strategy is tax efficient. The planning and strategies take time so it’s important to ensure you start at least 3-5 years out from your ideal retirement. With thoughtful planning and the right advice, you can create a retirement that’s not only financially secure but flexible, tax-efficient, and aligned with the legacy you want to leave behind.