Another rule, Lam offered, is to save roughly 25 times the amount of money you’d need for a year.
Max out your RRSP, especially in good years
Once you figure out how much money you need to retire, there’s the question of where to put it. Many workers, including those with employer-supported pension plans, save money in a registered retirement savings plan (RRSP). Maxing out any remaining contribution room is always an important strategy, but it is doubly so for self-employed people. Workplace pension plans cut into the maximum yearly allocation you can make to an RRSP, but as a self-employed person, you can put away far more than someone drawing a salary.
“If you are a sole proprietor, or if you’re incorporated and you’re paying yourself a salary, be sure to take advantage of maxing out your RRSPs,” Lam says, “because you have the ability to progressively grow registered assets.”
In 2024, the maximum contribution any Canadian can make to an RRSP is $31,560, or 18% of their earned income from the previous year, whichever is lower. Of course, any unused room in a previous year can be carried over to the next year. Don’t hesitate to do so if you’ve been lagging in your RRSP contributions.
Self-employed people often struggle with unpredictable income. Their restaurant, design studio or landscaping business might be doing great in one year, then fall flat the next. Or the small business can have periods of ups and downs throughout year. It matters that you save money in an RRSP because of Canada’s graduated tax system, as higher income earners pay a higher percentage of their gross income on taxes.
“You want to be able to (contribute to) your RRSPs in years when you have higher income, so you get the higher tax deductions,” Lam says.
Selling your business or assets
On top of maxing out RRSP contributions, Lam suggests self-employed people should also make use of tax-free savings accounts (TFSAs). These accounts, as the name suggests, offer a temporary reprieve from taxes on anything in them, which can be great for self-employed people who may owe far more in taxes than their friends on a payroll. Of course, TFSAs aren’t just for cash; you can also add longer-term investments, like exchange-traded funds (ETFs) and other securities.
For self-employed Canadians who own real estate or other physical assets, including intellectual property, equipment and other business-related assets, selling it off could give your retirement nest egg a significant boost. It’s a popular strategy: according to a 2023 report by the Canadian Federation of Independent Business, roughly $2 trillion in business assets is set to be sold in the next decade, and three-quarters of owners who plan to sell are doing so to fund retirement.
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