When used correctly, an IPP can be a super-powerful and tax-efficient investment and estate planning tool.
But First, A Primer:
An Individual Pension Plan is a defined benefit pension plan designed for business owners, incorporated professionals, and key employees of a corporation. It’s a retirement savings vehicle that combines the benefits of a traditional defined benefit pension plan with the flexibility and tax advantages available to incorporated individuals.
Unlike a typical Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), where contributions are subject to annual contribution limits, IPPs allow for more substantial contributions, making them particularly appealing to high-earning individuals who are looking to maximize their retirement savings.
Key Features and Benefits of IPPs:
1. Higher Contribution Limits: One of the standout features of IPPs is the ability to contribute larger amounts compared to traditional retirement savings vehicles. The contribution limit is based on a formula that considers an individual’s age, years of service, and average annual earnings. This can result in significantly higher annual contributions than those permitted by RRSPs.
2. Defined Benefit Structure: IPPs provide a guaranteed retirement benefit based on a predetermined formula. This means that participants can better predict their retirement income, providing financial security during their retirement years.
3. Creditor Protection: IPPs offer strong creditor protection, which can be particularly important for business owners and professionals who may be exposed to financial risks related to their business endeavors.
4. Tax Deductibility: Contributions made by the corporation to fund the IPP are tax-deductible, reducing the overall tax burden for both the individual and the corporation. Additionally, investment income within the IPP is tax-sheltered, allowing for tax-deferred growth.
5. Catch-Up Contributions: For individuals who are older and have lower pension accruals, IPPs allow for catch-up contributions, helping them accumulate retirement savings more rapidly.
6. Wealth Transfer and Estate Planning: IPPs can be structured to provide survivor benefits to a spouse or beneficiary upon the plan-holder’s death, making them a useful tool for estate planning and wealth transfer.
Eligibility and Considerations:
To be eligible for an IPP, an individual must be an incorporated business owner, a professional with an incorporated practice, or a key employee of a corporation. As IPPs are typically established and funded by the corporation, it’s essential to consider the financial stability of the business and its ability to consistently make contributions to the plan.
It’s important to note that IPPs come with certain regulatory requirements, including annual contributions, actuarial valuations, and mandatory minimum funding levels. Here at Foster & Associates we work closely with actuarial, accounting and legal professionals who are knowledgeable about IPPs to ensure compliance with all regulations and to tailor the plan to your needs and circumstances.
Individual Pension Plans (IPPs) are a powerful tool for high-earning individuals in Canada to bolster their retirement savings and ensure a secure financial future. With benefits ranging from higher contribution limits and defined benefit structures to tax advantages and creditor protection, IPPs provide a unique combination of features that distinguish them from other retirement savings options.
Consult with your Foster & Associates advisor to find out whether an IPP is right for you.
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
