Small business dilemma: Save or invest

It’s not just individuals who are failing to plan and prepare for their retirement. Canadian business owners are no better, having to choose between investing in business or saving for a comfortable retirement, according to a BMO Financial Group study.

Squeezed between slippery economic conditions and falling profit margins, almost half (49%) of those owning their own businesses are forced to make a decision over either contributing to their RRSP or making their business grow, the study noted.

With the backdrop of the February 29th RRSP contribution deadline, fewer self-employed Canadians (74%) reported that they were financially prepared for retirement compared to those that are paid employees (85$%), according to Statistics Canada.

“Small business owners often find themselves torn between investing in their business and saving for the future,” said Cathy Pin, vice president, commercial banking, BMO Bank of Montreal. “Although it’s tempting to concentrate on investing in your business, it’s critical for entrepreneurs to have personal retirement savings as well, since they can’t rely solely on the future value of their business to provide for their retirement.”

At a time when confidence is slipping, many Canadians have turned their focus to debt reduction, often at the detriment to retirement savings.

An RRSP, says Pin, can offer significant advantages for small business owners who are trying to accumulate wealth outside of their business.

Investments grow faster in an RRSP because of tax-deferred compound growth. Moreover, RRSPs with conservative holdings are effective during times of instability, offsetting the volatility of business returns.

For entrepreneurs, having a retirement nest egg is also important if unexpected circumstances arise, such as health problems for the business owner or a need to sell the business sooner than anticipated. If market conditions are not optimal for the selling of the business, RRSP savings can act as a safety net.

Small business owners will also experience tax benefits when they make RRSP contributions. For unincorporated small enterprises, money made in the business is considered personal income; RRSP contributions will reduce the business owner’s taxable income for the year of the contribution.

Tina Di Vito, head of BMO Retirement Institute says business owners must consider planning for their retirement needs, just the way they make plans in order for their business to succeed.

“Even if your business meets all of your financial needs in retirement, the money you save and invest in an RRSP can supplement your income for a more comfortable retirement,” said Di Vito. “Adding an RRSP to your retirement income plan is one of the best ways to save, offering tax-deferred compound growth that can give small business owners a safety net as retirement approaches.”

Every year, the RRSP deadline triggers a bout of soul-searching as Canadians take stock of their financial footing. While studies last year showed many Canadians wish they could turn back the clock to get a second go at savings. This year, however, most wish they could time travel to better manage their debt levels.