Read Mark's Tax Letter(r) article on IPPs to understand why business owners and incorporated professionals should use an IPP instead of a traditional RRSP to enjoy higher contribution limits, better returns, and wealth transfer to family members on a tax-free basis.
Read "IPP vs RRSP" HERE
Individual pension plans or IPPs have become a popular retirement savings tool for many executives. This is due in part to changes in provincial pension benefits legislation and to the active promotion of the potential advantages of IPPs by insurance companies and financial institutions. The primary candidates for IPPs are business owners, company executives and incorporated professionals over the age of 45 with an annual income of $100,000 or more.
An IPP is a defined benefit registered pension plan established for the benefit of a single employee. The annual retirement benefits funded by the plan are defined by the terms of the plan and are based on a percentage of the employee's annual employment income. Unlike a group pension plan, the benefits payable can be designed to suit the needs of the individual beneficiary of the IPP. The IPP can be funded by employer and employee contributions or fully funded by the employer. To qualify as an IPP the employer must fund at least 50% of the required contributions.
The most significant advantage of an IPP is the allowable contribution limit, which is generally higher than the contribution limits available under an RRSP. This enables the plan beneficiary to accumulate a significantly larger pool of retirement savings than would otherwise be accumulated using an RRSP. Other potential advantages include:
The ability to make pension contributions in respect of past employment service.
A guaranteed amount of retirement income if the employer agrees to fund additional contributions should the IPP realize poor investment returns.
Participation by the employee in the investment decisions made by the IPP.
Protection from creditors of both the employer and the employee (under provincial pension legislation).
Multiple retirement income options (annuities may be purchased from an insurance company, funds may be transferred to an RRSP or the IPP may pay an annual pension).
Although the advantages related to an IPP are significant, there are several disadvantages that must be fully considered:
Unlike an RRSP, the funds will be locked in and access will be restricted until retirement.
It is not possible to split retirement income by making a contribution to a spousal plan, as is the case for a spousal RRSP.
Defined benefit plans have extensive financial statement disclosure requirements and determining annual pension costs, asset values and liabilities, is complex.
Set-up costs and annual operating costs are significantly higher than those associated with an RRSP (an IPP requires an actuarial valuation on set-up and every three years thereafter).
An annual filing with Canada Revenue Agency is required for IPPs. However, in recent years the market for IPPs has become more competitive and the costs associated with establishing and maintaining an IPP have been reduced.
Is an IPP right for you? The answer will depend upon your particular circumstances. You should consider reviewing the IPP option if you are within 15 to 20 years of retirement, have an annual income of over $100,000 and anticipate retiring with your current employer.
Please contact us today for your no-obligation consultation. We look forward to helping you and your family.
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