Most people are familiar with an RRSP (Registered Retirement Savings Plan). While an RRSP is ideal for many employees, an IPP offers unique advantages for business owners and high-income professionals.
The growth in popularity for IPPs can be attributed to a number of factors. Personal and corporate tax rates have increased across Canada, greater income requirements in retirement and changes in tax policy for corporations have tasked owners with a sense of urgency when planning for their retirement savings.
The IPP is custom-designed and takes into account each participant’s needs and personal situation. The contributions required to finance the plan vary from person to person, based on factors such as age and income.
An IPP (Individual Pension Plan) allows you the potential to save significantly more versus an RRSP plan and gives you the opportunity to put aside more for retirement. These savings are achieved through higher contributions in an IPP which leads to a greater amount of tax deferral in an IPP.
The IPP is generally most advantageous for an individual who is 40 years of age or older, and who wants to contribute more money on a tax-sheltered basis than the maximum permitted for RRSPs. The IPP must be established by an incorporated company.
An IPP is a defined benefit pension plan that allows for greater tax-deferred contributions than an RRSP. Your annual pension is calculated by your years of employment and level of T4 income.
With an IPP, you will have the security of knowing how much you will receive in retirement. An RRSP, on the other hand, does not provide a defined, fixed income. With an IPP, you can have better peace of mind and be better able to plan your life post-retirement.
One of the more attractive features of an IPP is that past service may be used to increase contributions and retirement income. You can make up for the years of service if you may not have contributed enough for retirement. Any contributions for past service are considered a tax-deductible payment.
Essentially, an IPP is designed to act much like a large-scale public sector pension plan, which provides a known benefit at retirement.
Now that you are familiar with the differences between an IPP and RRSP, let’s take a look at some of the reasons why an IPP may be best for you:
If you are a high-income professional such as a doctor, dentist, lawyer, accountant or other incorporated professional - with a T4 income - then an IPP has been designed to meet your specific needs.
Each year, you can decide if your IPP pension benefit will be accrued using a defined benefit plan method. You can also choose a more traditional defined contribution plan method, such as an RRSP. No matter which contribution method that you choose, you will be able to enjoy a fixed income upon retirement.
As a high-income professional, an IPP is better designed to allow you to make the most of your contributions. In fact, you can make up to 65% higher contributions than those allowed under RRSPs. Of course, the exact amount of contributions will depend on different factors, most notably T4 income and your years of service.
IPPs have the ability for larger tax-deductible contributions than RRSPs. Additionally, IPPs can be back dated to allow for prior years of service which can lead to significant catch-up contributions.Therefore, an IPP can be an ideal option, in the right circumstances, for your retirement and estate plan.
Here is a look at how higher contributions via IPP can benefit you versus the traditional RRSP plan.
The example assumes a maximum annual income in salary and annuity increase of 5.5%, 3% indexing of annuities, and retirement at age 65. Source: https://ssq.ca/sites/default/files/archives/aii/Investissement_Documentation/IPP_Brochure_BRA1458A_201201_WEB.pdf
In this example, we will compare the IPP versus an RRSP with a return of 7.5% fora 45-year-old business owner who earns $145,000 annually.
Under an IPP, the same business owner is able to contribute more than an RRSP and accumulate a substantial amount of savings for their retirement.
The example clearly shows that the IPP allows the business owner to have a greater amount of retirement savings. Also, it does not include past years of service which can allow for additional contributions to the IPP.
If investments within the IPP return less than 7.5% in any given year, you may cover the shortfall through additional contributions. This is a tax-deductible expense for the company.
Chances are that your cash flow varies year to year. With the IPP pension, you are able to switch between each type of plan. For instance, if your business happens to have less cash flow, then you can switch to the less expensive contribution plan, such as your RRSP.
When you enroll in an IPP, you are able to enjoy a number of tax deductions for your corporation. This includes deductions on all of your investment and administrative fees.
Also, IPP assets enjoy creditor protection by provincial legislation. This type of creditor protection is not available for RRSPs in Ontario unless you have declared bankruptcy. In fact, an RRSP can only provide creditor protection if issued by a life insurance company.
If you want to ensure that your wealth can be passed to a spouse or a child, then an IPP will provide you with much more flexibility versus an RRSP.
For example, an RRSP is a fully taxed amount for the death of the second spouse. This tax can only be deferred to a spouse or a disabled child. If you have no spouse, then the RRSP is fully taxed upon your death.
If your spouse or child is employed in your company and earning a T4 income, they can be eligible to become members of the IPP. This allows IPP wealth to be passed to the next generation without incurring tax.
Overall, there are a number of advantages of opening an IPP, especially if your financial situation makes it easy for you to set up this type of account. Here is a summary of the benefits that an IPP offers over an RRSP:
● Designed for high income professionals
● Allows for defined benefits upon retirement
● You can contribute more towards your retirement
● Offers more tax deductions
● Can offer better creditor protection
● Provides greater flexibility according to your cash flow
● Permits you to make up for years of service by contributing additional funds
● Increased corporate and personal savings
● You can transfer your wealth tax- free
While the government of Canada offers a number of social services for those of retirement age, a comfortable retirement is dependent on taking decisive action on your savings and investing strategy today. If you’ve worked hard as a professional or business owner, you owe it to yourself and your family to ensure you’ve done all you can to save for your future. Therefore, it is important that you take action to plan your retirement as soon as possible.
If you are a professional or a business owner, hen you should take advantage of all the benefits of an IPP. Silver Cedar Wealth Management has worked with a number of professionals and business owners and happy to help set up an IPP plan. Contact me today at jschaffran@worldsourcesecurities.net and I can advise if an IPP is right for you.
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