As business owners and incorporated professionals plan for the future, ensuring financial security during retirement becomes a priority. One powerful tool to achieve this is the Individual Pension Plan (IPP). Designed to maximize retirement savings and offer tax efficiencies, IPPs are an excellent alternative to Registered Retirement Savings Plans (RRSPs) for certain individuals.
What is an IPP?
An IPP is a defined benefit pension plan established by a company for an individual. Unlike RRSPs, which have contribution limits set by the government, IPPs allow higher tax-deductible contributions, especially for those over 40. This plan provides greater predictability in retirement income by calculating benefits based on salary and years of service, making it ideal for high-income earners.
Key Advantages of IPPs
- Greater Capital Accumulation:
For individuals over 40, IPPs allow significantly higher contributions than RRSPs, enabling faster and more robust growth of retirement funds. - Predictable Retirement Income:
IPP contributions are calculated to meet defined benefit obligations, ensuring a stable and predictable retirement fund. - Tax Efficiency:
All contributions, actuarial fees, and investment management expenses are tax-deductible for the corporation. Additionally, IPP contributions are a non-taxable benefit for the individual, and investment growth is tax-deferred until retirement. - Additional Contributions for Gaps:
If investment returns fall below the CRA-prescribed rate of 7.5%, the sponsoring company can make additional tax-deductible contributions to bridge the gap. - Security Against Creditors:
IPP assets may be protected from creditors, providing an extra layer of security. (Consult a legal advisor for details.)
Who Can Benefit from an IPP?
IPPs are tailored for:
- Incorporated business owners and professionals who own at least 10% of the company shares.
- Individuals aged 40 to 71 with T4 income.
- Non-connected employees, although stricter rules apply.
Considerations and Costs
While IPPs offer significant benefits, they come with additional complexity and costs. For example:
- Actuarial valuations are required at setup and every three to four years.
- Administration fees are higher than those for RRSPs.
- Establishing an IPP may reduce RRSP contribution room.
- Additional funding may be necessary if investment returns fall short.
Real-World Example: Comparing IPP and RRSP Savings
A 55-year-old business owner with 25 years of service and an annual salary of $145,000 can save until age 71. At a 7.5% return rate, an IPP could generate $4.7 million in retirement income, compared to $3.1 million with an RRSP.
Is an IPP Right for You?
If you’re an incorporated professional or business owner seeking to maximize retirement savings, an IPP might be the perfect solution. It offers tax efficiencies, predictable income, and greater control over your financial future.
Take Action Today:
Contact a financial advisor to explore how an IPP could work for you. A personalized illustration can help you make an informed decision about securing your retirement. Visit our calendar to schedule your consultation.
