Sometimes, cashing out RRSPs is the only way to go to finance a small business startup, says a Toronto-based entrepreneur.
Evan Carmichael, of evancarmichael.com — which is dedicated to helping entrepreneurs grow their business — says it’s becoming increasingly difficult to get money from the bank to start a business.
“So quite a number of entrepreneurs do actually cash out some RRSPs because they have no other option,” he said.
The 29-year-old, who has a decade of experience with small business startups, said if that’s your only option, it’s not the worst thing you can do.
“The business itself can become a great little nest egg for yourself and your retirement,” he said.
Jeff Moulden is in the midst of starting up a home renovation business called HJM Home Improvements and recently cashed out about $10,000 of his RRSPs in order to build a shop in his garage.
He said losing some of the money to taxes was a consideration but it was a “necessary evil” — something he felt he had to do.
“It’s my money and rather than going further into debt, I thought I’d just capitalize on some of my retirement savings; I’m building this business for (retirement) anyway,” he said.
Paul Woolford, tax partner with KPMG Enterprise, says anyone considering cashing out RRSPs needs to be aware that they could lose a sizeable amount.
“If you take out $10,000 to help finance your business, depending on what tax bracket that individual is in — let’s assume that person’s in the highest tax bracket — roughly half of that $10,000 would be taken back,” he said.
Basically, the higher the tax bracket and the more money cashed out, the more that will be lost.
Woolford recommends leaving money in RRSPs until retirement and finding other means of financing a small business, such as third-party loans or personal savings if they’re available.
He also recommends investing money in the new tax-free savings account.
“If you earn $10 of interest on an RRSP, you have to report that on your income tax, unlike the tax-free savings account,” he said.
“You can take it out and you can actually put it back in the following year.”
Once a small business is up and running, however, investing in RRSPs is essential, said Carmichael.
Putting money into your RRSPs lowers your taxable income, which can keep you in a lower tax bracket and help you save at tax time.