I hear this question a lot and it isn't a one size fits all for business owners. While we might have been historically taught to save for retirement and own a house, depending on your business goals this might be a conflicting objective. I have discussions with clients all the time who are Amazon sellers, Shopify sellers and other business owners. "I want to save for a house, so what should I put in for my RRSP"?
When you contribute to an RRSP or FHSA, that may help save/defer some personal income taxes now, but that cash will not be available for the business to use. Putting $1,000 in an RRSP doesn't save you $1,000 in taxes, it will save you, whatever tax rate you are at.
Simple math: say you make $90,000 a year and your tax rate is 31.48%, putting $1,000 in an RRSP will save you about $314.80 in taxes. Putting $1,000 in an RRSP is $1,000 you can't use in your business.
Now if you paid the 31.48% in tax on the $1,000, that would leave you with about $685.20 after the tax is paid. While no one likes to pay taxes, that would leave you with some cash to reinvest in your business.
Amazon and Shopify businesses that require inventory is a capital-intensive business. You need cash for inventory, fees, PPC and more. If you contribute too much to savings accounts, will that limit your cash flow and ability to scale your business next year? Will that cost your business and the long term earnings from the business? Would putting too much into savings restrict the long term?
On the flip side, keeping too much in your business and growing means delaying your personal financial goals like homeownership, and if that is a goal of the business, then maybe there needs to be a balance.
I also hear there are lots of sellers who sometimes focus too much on growing and reinvesting and not taking money out for themselves and enjoying the fruits of their labour, such as home ownership.
Comparing the Two Options
- Potential Return: Investing in business is high (if the business scales well). RRSP/FHSA is moderate (investments depend on market performance).
- Liquidity: Investing in business means cash is tied up in inventory, harder to access. RRSP funds are locked unless used for Home Buyers' Plan (HBP); FHSA is tax-free but requires home purchase.
- Risk: Business could fail or slow down. RRSP/FHSA investments are diversified, lower risk.
- Tax Benefits: Business expenses lower taxable income. RRSP contributions lower taxable income; FHSA allows tax-free home savings.
Finding a Balance
Consider contributing just enough to your RRSP to lower your taxable income while keeping most cash available for business. Use the FHSA if you're serious about buying a house (tax-free withdrawals make it attractive). If your Amazon business has high margins and stable cash flow, you might afford to contribute to both. If your business is still growing, it might be smarter to reinvest profits and delay heavy contributions to savings.
What's the Best Move for You?
If you're in growth mode, it may be better to prioritize your business first and save for a home later.
If you're already profitable and want to secure personal financial stability, leveraging the FHSA and RRSP (while still keeping enough cash in the business) could be a smart strategy.
Ok so to develop the right financial strategy for balancing your business growth with saving for a first home, let's break this down into a few steps. These are just some thoughts to get you thinking and not telling you an exact mix to follow.
Look at Your Business Financial Health
Before deciding how much to put into an RRSP or FHSA, determine:
- Profitability: Are you consistently making profits? If yes, how much cash is left after business expenses? If you're not profitable, then we have bigger issues and should probably stop here.
- Cash Flow Stability: Do you have enough money for inventory, PPC, Amazon fees, and unexpected costs? Any big capital costs needed soon?
- Growth Stage: Are you scaling aggressively, or is your business stable?
If your business is in rapid growth mode, prioritize reinvestment. If your business is generating strong, steady profits, consider moving some funds into tax-advantaged savings.
Understanding the Tax and Investment Benefits
FHSA (First Home Savings Account)
- Best for home savings: Contributions are tax-deductible, and withdrawals are tax-free if used for a first home.
- Limit: $8,000 per year, up to $40,000 total.
- Flexibility: If you decide not to buy a house, you can transfer funds to your RRSP tax-free.
RRSP (Registered Retirement Savings Plan)
- Best