When It Doesn’t Make Sense for a Business Owner to Invest in RRSPs [Secret Sauce Ep12]

Listen here on our website:

Or jump to this episode on your favourite platform:

Are you making the most out of your RRSP investments as a business owner, or is there a better way to secure your financial future?

In this episode, we tackle the critical question of whether your current investment strategy is truly aligned with your long-term goals. If you’ve been contributing to an RRSP as a business owner, but you’re unsure if it’s the best approach, this discussion is for you. We explore alternative strategies, like using participating whole life insurance, that might offer better returns, greater flexibility, and significant tax advantages. Understanding how to maximize your investment vehicles can be the difference between a comfortable retirement and one filled with financial uncertainty.

By diving into the specifics of real client scenarios, we shed light on the potential pitfalls of overly conservative investment strategies and how you can optimize your portfolio to better suit your risk tolerance and financial objectives. Whether you’re a business owner looking to leverage retained earnings or simply someone seeking a smarter way to grow your savings, this episode offers valuable insights that can help you make more informed decisions about your financial future.

• Discover how whole life insurance can offer comparable returns to your RRSP with added tax benefits.
• Learn how to optimize your investment strategy to better align with your risk tolerance and long-term goals.
• Understand the benefits of leveraging insurance policies for retirement income and estate planning.

Tune in now to uncover strategies that could transform your financial future—don’t let conservative investments limit your potential!

Resources:

• Like this short, “Wealth Secret Sauce” Episode? Tell us in your rating and review on Apple Podcasts. 
• Dig into our Ultimate Investment Book List
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.  

Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Are your current RRSP and retirement strategies really maximizing your financial potential, or could you benefit from a smarter approach? In this episode, we explore Canadian investing options like RRSPs, IPPs, and innovative strategies like Infinite Banking and Participating Whole Life Insurance. Learn how to bank on yourself, minimize income taxes, and leverage permanent and universal life insurance for a low-tax, secure financial future. Don’t miss out on insights that could reshape your retirement planning. Tune in now!

On the Canadian Wealth Secrets Podcast, we routinely discuss Canadian investment portfolios, rates of return, Canadian real estate, incorporated business owners, corporate wealth management, participating whole life insurance, infinite banking, bank on yourself and much more!

Watch Now!

Transcript:

Hey there, Canadian Wealth Secret seekers. It’s Kyle here for another Friday edition of our Secret Sauce episodes.

Today, I’m going to the inbox again and pulling up an email from a client who’s struggling to figure out what’s best given their specific situation. In this case, it’s Mark’s spouse, who has an operating company and has been making some RRSP contributions. Let me pull it up here and read it out for those listening on the podcast.

The email says, “Thanks, Kyle. Sorry for not replying sooner. We’ve had a busy couple of weeks, including some unexpected expenses at our rental property. The AC and furnace had to be replaced.” We all know how that goes—it’s always a thrill when you get more capital expenditures. Not only does it cost money, but it also hurts your soul a bit and takes time and effort. The email continues, “This drain on our retained earnings has slowed us down a bit with making any large financial decisions, as it should. I think the best option would be to contribute between $20,000 and $30,000 annually. But we want to make sure there aren’t any drawbacks as it relates to our retirement plans as they currently stand. We are still weighing this option and will continue the process, hopefully making a decision soon. With it being as big of a financial decision as it is, we really want to make sure this is the right choice. Talk soon, Mark.”

Absolutely, Mark. It’s important to fully understand what’s going on. I always say, if it doesn’t feel like a no-brainer for your situation, then it’s one of two things: either it’s not a no-brainer and might not be a good fit, or you don’t know enough yet. So, make sure you understand it well enough to make a decision as to whether it is a no-brainer or not. If you’re somewhere in the middle, you’re essentially flipping a coin or rolling the dice, depending on how confident you are.

Now, let me bring you up to speed on what’s going on. Mark’s spouse has been contributing to an RRSP for some time. RRSPs aren’t inherently bad, but it depends on what’s going on inside them. Mark’s spouse is very conservative and risk-averse. While it makes sense rationally to be more equity-focused in the portfolio, that’s not their risk tolerance level, so they don’t feel emotionally able to make that choice. That’s okay—you work with what you have and don’t put yourself in a position where you feel uncomfortable.

Even though it makes sense to be more equity-focused, this particular RRSP is 93% in mutual funds, but the mutual fund selection is a balanced fund. A balanced fund limits downside risk but also limits upside potential. It’s not a great move for those who are well off with a long time horizon towards retirement—about 15 years in this case. The RRSP has been invested in these funds for over 10 years, with about $250,000 in the account. However, the average return is around 4.14%, which is what you might expect in a well-designed whole life policy with high cash value.

The current plan is to invest $20,000 to $30,000 into this RRSP account, which is a balanced fund, likely to continue at around the same rate. But what would happen if we kept doing this? In 15 years, with the same return, it would grow, but not as significantly as we might hope.

Now, let’s compare this to what would happen if we started now with the same $30,000 inside the corporation with a participating whole life insurance policy. By age 60, the cash value of this policy could be around $665,000, with a death benefit of about $1.6 million. If the participant passed at age 60, $1.2 million of that would come out tax-free through the capital dividend account to shareholders.

If we leverage this policy for income in retirement, we can pull out $41,250 after tax, which is almost the same as what the RRSP would provide. However, the policy starts with a balance of $0, while the RRSP has $250,000 already. Over time, the insurance policy could catch up and even surpass the RRSP in value, especially considering the tax-free benefits and the death benefit.

In summary, the secret sauce here is not about where you’re putting the money—RRSP, TFSA, insurance, or otherwise—but what you’re investing in. Conservative investments like a balanced fund in an RRSP might not offer the tax benefits you hope for. It might make more sense to invest in a policy that offers similar returns with added benefits like tax-free leverage for retirement income and a tax-free death benefit.

Hopefully, you found this Wealth Secret Sauce episode helpful. My name’s Kyle, and remember, you can reach out to us to review your situation and figure out the best move for you, given your risk tolerance, runway, and business specifics. Reach out at canadianwealthsecrets.com/discovery and book a call today. If you enjoyed the episode, please share it with someone you know and care about, and leave us a rating and review on Apple Podcasts.

We’ll see you in the next episode. Take care.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

OPTIMIZE YOUR FINANCIAL FUTURE