How Individual Pension Plans Offer Up to 65% More Tax Savings Than RRSPs
Learn how an individual pension plan can reduce taxable corporate income and help business owners save more for retirement as we answer clients’ most frequently asked questions.
Godfrey Yu
Wealth Planner and Relationship Manager
Ready for retirement? As a hardworking business owner, you will have earned it. But when the time comes to turn off your daily alarm clock and hang up your hat for good, will you have pulled every tax lever available and made the most of your savings?
Often, we find that clients fail to consider all the tax-friendly retirement vehicles open to them. Individual Pension Plans (IPPs), for example. While many Canadians are aware of Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs)—perhaps, even group offerings through a professional association—they may not be familiar with the option that can reduce corporate taxable income and help owner-operators save more for retirement.
What is an individual pension plan?
An IPP is an employer-sponsored defined benefit pension plan that can be established for or by a single person who matches certain criteria. That means you, as a business owner, can start an IPP for yourself through contributions by your company to build your retirement income.
An IPP allows for the accumulation of greater assets—up to 65% more than an RRSP.
| Age | RRSP Contribution | IPP Contribution | IPP Advantage | |
|---|---|---|---|---|
| 45 | $30,780 | $36,400 | $5,620 | 18% |
| 50 | $30,780 | $40,000 | $9,220 | 30% |
| 55 | $30,780 | $43,900 | $13,120 | 43% |
| 60 | $30,780 | $48,200 | $17,420 | 57% |
| 65 | $30,780 | $50,600 | $19,820 | 64% |
For illustration purposes only.
Unlike an RRSP, where there is an annual maximum limit of $30,780 for 2023 (reached at an income of $171,000), an IPP’s contribution room grows as you age. It is also possible to calculate and fund past employment services dating back to 1991.
Who can set up an IPP?
To sponsor an IPP, a company must be incorporated and the member an employee or “connected person” (someone holding 10% or more of shares in the business). They must also earn T4 income.
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While there is no salary requirement, individuals over the age of 40 and earning more than $100,000 should consider an IPP.
How can an IPP reduce your tax bill?
Going beyond being a tax shelter, IPPs, as well as Personal Pension Plans (PPPs) and Family Pension Plans (FPPs), each have advantages that allow for smooth intergenerational wealth transfer.
For instance, a family member can be added to an existing IPP after their loved one retires, and they can transfer any assets not used by the retiree tax-free. It can also lessen the taxable income when selling the business to relatives and, in some cases, in the event of early retirement.
What are the pros and cons of an IPP?
Here are several benefits and potential drawbacks for members:
Pros:
o Entitled to creditor protection depending on the province.
o Eligible for pension splitting at any time.
o Company contributions are deductible from its income.
o Returns are tax-sheltered.
Cons:
o Comes at a higher cost than an RRSP. Fortunately, many administration and trustee fees for setting up an IPP are deductible to the business.
o IPP contributions limit your RRSP room, including spousal contributions.
o Funds are locked in until retirement and cannot be accessed for any reason.
What happens to your IPP upon retirement?
IPP members might have several options when they retire or if employment is terminated, including the following:
Receive a monthly pension as per the terms of the agreement.
Purchase an annuity from an insurance company.
Transfer to a locked-in registered plan, such as an RRSP, Life Income Fund (LIF) or Locked-in Retirement Income Fund (LRIF). It is possible for funds to exceed the allowable transfer limit; however, and any amounts over will be taxable.
Is an IPP right for you?
Retirement planning can be overwhelming, particularly as high-interest rates and persistent inflation continue to increase the cost of living. An IPP can allow you to take retirement planning into your own hands and maximize your contributions on your terms—and we at JCIC are here to help you navigate the process.
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