A [Self-Employed] Practitioners Cheat Sheet for Saving Money
/The money you save should be working for you. You work hard changing lives, spend less than you earn, and at the end of the month you’re left with some extra cash. This article lays out what you can do with that extra cash, comparing TFSAs to RRSPs to saving in a corporation.
Return = A profit on investment. It can be measured in absolute terms (dollars) or a percentage amount. In our examples we’ll use percentage amounts since the dollar amount will vary depending on how much money you’ve investing.
TFSA (Tax Free Savings Account)
What is it? It's a type of account that lets you earn investment income tax-free and withdraw it anytime without tax or penalty. Think of your TFSA as a vessel through which you can invest in things like stocks, bonds and GICs (Guaranteed Investment Certificates).
Best for those who are in the lowest tax bracket (with income less than $45,000) or those saving for the short-term (anything before retirement).
The perfect candidate is a new practitioner in her second year of practice who wants to save for her maternity leave fund. Her current income is around $30,000 annually and she thinks her income will double in 4 years, when she wants to take her mat leave.
How does it work? When you put money in, it's not tax-deductible, meaning money you put in now does not help reduce your taxes this year. The good part? All of the money you earn (through investing) is tax-free! When you withdraw your funds (i.e. taking money out to pay for your vacation, mat leave, anything), you won’t pay any taxes.
The maximum annual contribution limit for 2019 is $6,000. However, if you’ve never used your TFSA, you have been accumulating unused contribution room since you were 18.
RRSP (Registered Retirement Savings Plan)
What is it? It’s a type of account designed to help you save for retirement. Similar to a TFSA, money you deposit in your RRSP can be invested into a variety of options like stocks, bonds and GICs (Guaranteed Investment Certificates). Your contribution to your RRSP can be deducted on your tax return, but most withdrawals are added to your income.
Best for those who are currently earning more money than what they plan to be earning when they retire.
The perfect candidate is a seasoned practitioner in her sixth year of practice with income around $100,000 annually. She wants to save for an early retirement and make sure she has enough money to travel the world and enjoy herself. She knows when she takes this money out she’ll be earning much less since she won’t have any other income.
How does it work? When you put money in you’ll get a tax deduction, which helps lower your taxes (this is why this is good for those in higher income brackets). When you take money out, you pay taxes at your applicable tax rate. If you’re saving for a time in the future when you know you won’t be earning as much (e.g., retirement), this is a win.
The maximum contribution limit is generally 18% of your earned income from the previous year, up to $26,500.
Corporation
Incorporating as a practitioner (aka practising through a professional corporation) opens up an entirely different level of savings options compared to personal savings options like the two we’ve mentioned above. Similar to TFSAs and RRSPs, money you deposit in your corporation can be invested into a variety of options like stocks, bonds and GICs (Guaranteed Investment Certificates).
Best for those who don’t need to spend everything they earn and have $40,000+ income at the end of the year.
The perfect candidate is a practitioner is in her third year of practice with income around $50,000 annually. She’s married with a spouse earning $80,000 annually. As much as possible they use the spouse’s income to cover expenses, and her income is used only to supplement extra expenses that come up (like vacations, furniture, etc.). She leaves the vast majority of her income in her corporation, and only withdraws money when they need a little extra. They plan to withdraw from her corporation in three years’ time during her maternity leave.
How does it work? Money you leave in your corporation is taxed at a low corporate tax rate, so you want to withdraw as little as possible from the corporate bank account, focusing on saving those funds instead. When you withdraw money from the corporation, you’ll be taxed at your higher personal tax rate (depending on your income at the time).