Individual Pension Plans

Saving money on taxes is a key aspect of financial planning, and tax deferral plays an important role. Business owners often tell me about wanting to save on taxes, but may not be aware of an opportunity for additional tax deferral. This opportunity is the Individual Pension Plan.

Individual Pension Plans have become an increasingly important retirement-planning strategy for incorporated business owners and high-income professionals seeking to enhance their retirement savings beyond the limits of an RRSP. Let’s explore how the individual pension plan works and why it could be a great strategy for your financial plan.

What Is an IPP?

An Individual Pension Plan (IPP) is a registered defined benefit pension plan established by an incorporated employer on behalf of an eligible employee, most commonly the owner of the company or a senior executive. An IPP is designed to provide a specific amount of retirement income. Employer contributions are generally tax-deductible, and investments within the IPP grow tax-deferred until retirement income is paid. Investments inside your IPP can be similar to the investments inside your current RRSPs and TFSAs.

Why an IPP?

You have the potential for higher annual contribution limits compared with RRSPs, especially as you age. This means IPP holders may be able to accumulate significantly larger tax-deferred savings.

Employer contributions are tax-deductible, allowing business owners to transfer corporate earnings to an IPP while reducing business income. Investments inside an IPP grow tax-deferred over time, which provides long-term tax advantages to account holders.

When an IPP is first established, it may be possible to recognize eligible years of past service. This creates an opportunity for the business to make additional tax-deductible contributions and help accelerate retirement savings. IPPs also provide predictable retirement income, offering greater certainty and peace of mind.

How Much Can Be Contributed to an IPP?

Age	RRSP Contribution	IPP Contribution	IPP Advantage	Advantage
45	$33,800	$40,800	$7,000	21%
50	$33,800	$44,800	$11,000	33%
55	$33,800	$49,200	$15,400	46%
60	$33,800	$54,100	$20,300	60%
65	$33,800	$56,700	$22,900	68%

Ideal IPP Candidates

1. High-income professionals and executives: Lawyers, accountants, doctors, and dentists are strong IPP candidates because they earn high, stable, and predictable income.
2. Incorporated business owners: IPPs are implemented for incorporated business owners, allowing the corporation a tax deduction and the business owner a tax-deferred investment.
3. Salary over dividends: IPP contribution calculations are based on T4 employment income, or salary, so owners who compensate themselves primarily through dividends may not be eligible for the same benefits.
4. Over age 40: Annual contribution limits to IPPs often exceed RRSP limits as people approach retirement. Therefore, IPPs are recommended for business owners over age 40.
5. Long-term retirement planning: IPPs are suitable for those focused on building long-term retirement income.

The Plan Setup

IPPs are more complex than a traditional RRSP and require specific steps to establish. When setting up an individual pension plan, it is important to consult with your financial advisor and accountant because the plan needs to be registered with the Canada Revenue Agency and comply with pension legislation.

An independent actuary also needs to perform a valuation to determine the amount your company must contribute to adequately fund your future pension. This calculation is based on your age, pensionable earnings, years of service, expected retirement age, life expectancy, and expected investment returns. Contributions are tailored to you rather than based on standard annual RRSP contribution limits.

IPP in Action

Consider Blake. He is 55 years old, has been an incorporated dentist for 10 years, has maximum T4 earnings, and has $300,000 in RRSPs. Blake will immediately have $187,800 in past-service funding, which is a tax deduction for his company. Blake has over $611,000 more in tax-deductible contribution room over his working years. His IPP can also accumulate up to $1.1 million more in assets than an RRSP.

Is an IPP Right for Me?

IPPs provide the opportunity for significantly higher contribution limits, corporate tax deductions, tax-deferred growth, and predictable retirement income. When contemplating an IPP, it is important to discuss it with your accountant and financial advisor to make sure the strategy is right for you. Please reach out if you think this may be of help to you.