While many entrepreneurs count the value of their business as a key component of personal net worth and a significant contributor to retirement income, it’s also essential an RRSP and to maximize contributions to it, says Bank of Montreal.

“Many small business owners rely on the sale of their business to fund their retirement, which can be a risky approach if you can’t sell for the price you need or you are forced to step away from the business sooner than you planned,” says Gail Cocker, senior vice president, BMO commercial banking. “It’s important for business owners to look at the bigger picture and have a diversified financial plan that also includes an RRSP.”

A BMO survey found that 13% of small business owners in Canada don’t know how the value of their business may have changed since the recession. A varied approach to planning, including an RRSP, can help entrepreneurs ensure a secure retirement income.

There are a number of reasons why small business owners should consider an RRSP:

> Diversification
By contributing to an RRSP, business owners establish a source of income independent from their business. In the event that the sale of their businesses don’t provide the capital they need, thye can count on their RRSPs to provide retirement income.

> Tax benefits
Every dollar business owners contribute to an RRSP reduces their taxable income for the year of contribution. Within the plan, the tax on investment income is deferred until the year of withdrawal. Over the long term, the power of tax-deferred compound growth is substantial.

> Security
Business owners know that their businesses can be affected by factors beyond their control — such as an economic downturn. An RRSP that holds conservative investments such as Guaranteed Investment Certificates (GICs), government bonds or Treasury bills is an effective way to offset the volatility of your business returns.

> Flexibility
The primary goal of an RRSP is retirement savings, but it can also be used for other purposes. For example, under the Lifelong Learning Plan, business owners can withdraw RRSP funds to pay for education for themselves or their spousal partners.

> Bargaining power
With the strength of an RRSP behind them, business owners are a better position to hold out until they find the right buyer for their businesses.

Protection
Unexpected health problems later in life may require business owners to exit their businesses sooner than they had planned — perhaps at an unfavourable time to sell. With the resource of your RRSP, they would be in a better position to still achieve their desired retirement lifestyle.

> Reliability
At any time, business owners can convert your RRSP to an annuity that will provide them with guaranteed income for life.

IE