Having a source of income in retirement is invaluable. If you’re an incorporated business owner or professional, you can set up an Individual Pension Plan (IPP) to help fund your golden years. An IPP works differently from an RRSP. It’s not for everyone, so understanding its key features, how it can benefit you, and the disadvantages is essential. For detailed information about IPPs for business owners, Ottawa residents should contact a Financial Planner.
What is an Individual Pension Plan (IPP)?
An IPP is a type of defined benefit pension plan that your company can set up for you if you’re:
- An incorporated business owner
- An incorporated professional (doctor, lawyer, etc.)
- Earn T4 income
As a defined benefit plan, an IPP is designed to provide you with a secure and predictable amount of retirement income throughout your lifetime, offering a sense of security and peace of mind.
Do they offer more benefits than an RRSP?
When comparing an IPP to an RRSP, Ontario residents should consider their current and future circumstances. An IPP offers unique advantages such as increased contribution room, a specific monthly payment structure, and enhanced protection from creditors, which an RRSP does not provide.
- You’ll have more contribution room with an IPP than an RRSP, especially if you’re over the age of 50
- IPPs are designed to pay you a specific amount each month, but RRSPs are not
- IPPs typically have more protection from creditors than RRSPs
- If you pass away, you may be able to pass the IPP on to your spouse or children on a tax-deferred basis
- IPPs provide the corporation with a tax deduction for the contribution and fees
What are the disadvantages of an IPP vs. an RRSP?
IPPs make sense for some professionals, but the RRSP is still a great savings tool. Some things to consider before opening an IPP are:
- You deduct your RRSP contribution from your income, but the company claims the deduction for the IPP unless you have made the contribution
- RRSPs are less expensive to set up and maintain than an IPP
- The federal government and provinces establish the rules for IPPs, and these rules can vary from province to province
- The federal government sets RRSP rules, so they’re standard across Canada
- They can be more complicated than an RRSP
- Your business must have the cash flow to maintain payments to the IPP and must make up any shortfalls to the plan, which are requirements that RRSPs don’t have
- IPPs don’t offer a spousal plan that you can contribute to
- You have greater freedom to make investment choices in an RRSP compared to an IPP
- You can’t take money from your IPP; however, you can withdraw funds from your RRSP if you need them
How do you set up an IPP?
IPPs are defined benefit pension plans. Your employer must agree to set up and sponsor the plan. To ensure that there’ll be enough money to meet the plan’s future obligations, an actuary must perform calculations for the plan when setting up an IPP in Ontario. Additionally, an actuary must review the plan every three years to make sure it’s on track to fulfill its financial commitment.
Does an IPP affect my RRSP contribution room?
Contributions to an IPP will reduce your RRSP contribution room. However, the company contributes to your IPP on a pre-tax basis. You can also make contributions to your IPP for past service. Another benefit is that you can transfer your RRSP to your IPP without tax consequences.
What happens to the money when I retire with an IPP vs. an RRSP?
You have several options for withdrawing funds from your IPP during retirement. The first is that you can receive payments from the plan. Another option is to purchase an annuity from a life insurance company. Alternatively, you can transfer the funds to a Locked-in Retirement Income Fund or a Life-Income Fund. Payment options are typically limited by minimums and maximums set by the government.
With RRSP funds, you have the flexibility to transfer them to a Registered Retirement Income Fund at any time or purchase an annuity. A RRIF allows you to set your payments to the amount you choose, giving you greater control over your financial decisions.
What happens to my IPP if I pass away?
IPPs have a guarantee period. If you pass away before the guarantee period expires, the plan pays the full payment amount to the beneficiary. After the guarantee period expires, the plan pays 66.66% of the payments. Once the remaining beneficiary passes away, the remaining funds are paid to the beneficiaries. The beneficiaries, instead of the deceased’s estate, pay the taxes owing. Having the beneficiaries pay the taxes rather than the estate can lead to a lower tax bill.
Who should consider an IPP?
These plans are best for individuals who are:
- Incorporated business owners or professionals
- Qualifying individuals who are 40 or older and who earn more than $100k per year
- Those who want to contribute more to a tax-sheltered plan than the RRSP allows
Is An IPP Right For Me?
These plans can be complex and costly. Meeting with a financial planner will provide you with the guidance and information you need to make the best decision for your circumstances. If you’re considering an IPP for business owners, Ottawa financial planners at MDL Financial Group have extensive experience with IPPs. We’ll help you design your ideal financial future and determine if an IPP is the best option to help you achieve your goals. Book an appointment with us online or by calling 613-416-9649. We’re here to support you!
If you liked this article, here are three more you might be interested in:
https://mdlfinancialgroup.ca/which-structure-is-right-for-your-business/
https://mdlfinancialgroup.ca/tax-opportunities-in-retirement/
