Retirement Planning

Congrats on being brave enough to start your own business, Stephanie. You're part of a trend. As for your retirement question, an RRSP is the best way to save for retirement.

Let me see if I can explain the benefit of the tax deferral.

Let's say you make $50,000 a year, and your marginal tax rate is 30%. That means on the last dollar you earn in income, you'll pay 30¢ in tax… unless you put it in an RRSP. If you do put that dollar in an RRSP then either:

a) you won't have to pay tax on it; since you're self employed, you may not be deducting tax and remitting it monthly, but you would have a tax bill at the end of your first year, and then quarterly thereafter, or

b) if you have paid tax on your income, you'd get the 30¢ you'd paid on that dollar back.

Now, when it comes to retirement, you will have to pay tax on the money you pull out of the RRSP (or RRIF if you convert to a RRIF). But since you haven't paid tax on that money yet, you aren't being "double-taxed", as some people think. And if your tax rate is lower because your income is lower, then you'll pay less tax.

The other HUGE benefit of an RRSP is that for as long as the money remains inside the plan, it grows on a tax-deferred basis, meaning you don't have to pay tax on any of the interest/dividend/capital gains you earn on your money. That means a ton more money inside the plan than you could earn outside the plan, particularly if you're using interest-bearing investments.

Hope that helps.