Business owners and incorporated professionals are not often members of a pension plan like those traditionally employed by a company. In many instances, they rely on their RRSPs as a retirement savings vehicle, which may not be sufficient. One solution that can help increase their retirement savings potential is an individual pension plan (IPP).
For business owners, the IPP essentially replaces the RRSP. This account allows qualified business owners the ability to further increase their contributions into a retirement vehicle. An IPP is a defined benefit registered pension plan for specified individuals (i.e. business owners, incorporated professionals and key employees). The plan is sponsored by the corporation and the contribution room is based on the employment income earned. The growth within the IPP is tax-deferred, like the RRSP.
Why consider an IPP when the general idea is similar to RRSP? The key differences below offer enhanced benefits to a business owner:
1) The accumulated tax-sheltered savings in IPP can be dramatically larger than the RRSP contribution room limit. The IPP contribution amounts are calculated by an actuary and are based on factors including, past and current earnings, performance of the IPP and the timing of your retirement. Ultimately, the IPP contribution room tends to be larger than the RRSP contribution room.
2) Contributions into the IPP are fully tax deductible by the company.
3) Any IPP related expenses (i.e. administration and/or management fees) are also tax deductible.
The ideal candidates to consider an IPPs are business owners or incorporated professionals who are 40 and over and have received T4 employment income.
Once the funds are contributed in the IPP, the allowable investments are similar to those held in an RRSP (i.e. GICs, bonds, mutual funds, pooled funds, and stocks). That said, the trustee of the IPP has a duty to ensure the investments are managed in a prudent manner. For example, a common “prudent investor” rule would dictate that a security should not comprise more than 10% of the market value of the plan.
At retirement, the IPP can 1) remain in force as long the corporation continues to sponsor the plan 2) retirement benefits are paid out or 3) the IPP is wound down into another registered vehicle (RRSP or RRIF).
The IPP can be a very powerful tool for incorporated business owners and professionals. To see if this is a vehicle that is appropriate for you, please speak with a member of our team.
