As a Canadian business owner and incorporated professional, you understand the importance of planning for retirement outside of your business value. An Individual Pension Plan (IPP) is a great retirement tool, especially for high-income earners aged 40 and up.
What is an IPP?
An IPP is a defined pension plan registered with the Canadian Revenue Agency (CRA) and designed for single members such as business owners. It calculates your retirement income based on your years of service, salary, and predetermined rate of return.
Here are some benefits of an IPP:
- Higher Contribution Limits – You can typically contribute more money to an IPP than your own RRSP, allowing you to save more for retirement and create higher retirement income.
- Ability to make up for past contributions – With an IPP, you can make a lump sum contribution from your company for periods when you were employed but did not have an IPP. This past service contribution can be amortized over several years or as a lump sum payment. This can lead to significant increases in retirement savings.
- Tax-deductible contributions to your company – The contributions made by your corporation to an IPP are tax-deductible, including the annual contributions, any lump sum catch-up contribution, and any fees involved with the plan. For example, the corporation may deduct investment fees, but not for your RRSP.
- Creditor Protection – Funds invested in an IPP are considered creditor protected.
- Passive Investment Rules – Business owners who have built up passive investments may benefit from funding an IPP to help avoid the passive income tax rules for CCPC and remove shareholder’s equity from the business.
- Flexible Retirement Income – At retirement, you have three options to create retirement income: use the funds to purchase a life or joint-life annuity, maintain the IPP, or transfer the funds to a locked-in retirement account (subject to CRA rules).
- Flexible Retirement Age – You can retire as young as age 55 or as late as age 71.
- Investment Risk – An actuarial valuation is done periodically and includes a calculation of the rate of return of the IPP to see if the IPP is on track. If there is a deficiency due to poor investment returns, the company can make additional tax-deductible contributions to get it back on track.
- Estate Planning – Your spouse/CLP is always the beneficiary of an IPP, and if there is no spouse/CLP, you can name someone else.
An IPP is a valuable retirement savings tool for Canadian business owners and incorporated professionals that can allow them to increase their retirement savings and income.
You should speak to your financial advisor and review based on your specific situation to see if it can make sense.
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For more information, refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing and transferring wealth by Jack Lumsden, MBA, CFP®.
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This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made regarding its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
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