Setting yourself up with consistent income for your retirement years is a wise strategy, even if you don’t plan to retire. A steady income allows you to continue working on your terms while meeting your financial needs. It also gives you the option to retire if you want to.
Two effective strategies for incorporated business owners and professionals are the Registered Retirement Savings Plan (RRSP) and the Individual Pension Plan. In this article, we’ll look at the advantages and disadvantages of each. However, when considering an IPP vs. RRSP, Ottawa business owners and professionals will benefit from consulting with a financial planner.
Individual Pension Plans (IPPs)
An IPP is similar to a defined pension plan for incorporated business owners or professionals with T4 income. Some examples of businesses and professionals in Ottawa that could benefit from an IPP are owners of IT companies, companies that offer trades like electrical, plumbing or HVAC, and physicians and dentists. IPP benefits for business owners include:
- Higher contribution limits than an RRSP
- Tax-deferred investments
- Contributions for the plan are tax deductible for the business or the individual
- IPPs offer options for a more tax-favourable wealth transfer if you pass away
IPPs also have disadvantages, which, depending on your circumstances, can make them less appealing than an RRSP. The most significant disadvantages are:
- They are expensive to set up and maintain
- There are some investment restrictions on the plan because they are pensions
- IPPs reduce your RRSP contribution room
- They are subject to the federal and provincial pension rules of your province. For example, for those with an Individual Pension Plan, Ontario and federal pension rules apply to Ontario residents
IPPs vs. RRSPs
Each plan is a way to save for retirement. So, how do they compare? The following chart demonstrates some of the key differences between the two:
| RRSP | IPP | |
| Age | Any age | Best for those over 40 |
| Investor | Any individual with qualifying earned income | Incorporated business owners, incorporated professionals |
| Types of income | Earned income | T4 income |
| Maximum contribution limit | 18% of the previous year’s earned income less pension adjustment subject to a yearly maximum | Limits increase with age and are typically higher than RRSP limits |
| Deduction | You claim the deduction on your income taxes | The corporation or the individual deducts the contribution amount |
| When you must start withdrawing from the plan | Age 71 | Age 71 |
| Convert to a retirement income stream before age 71? | Yes | Yes |
| Types of investments | You have complete control over choosing and structuring your investments | Investment choices are subject to the limits set by pension rules |
| Fees | Fees can be as low as zero | High costs to set up and maintain because IPPs need to be set up by an actuary and reviewed regularly |
| Tax-sheltered growth while in the plan | Yes | Yes |
| How to withdraw | Convert to a Registered Retirement Income Fund, annuity or taxable cash | Annuity, Locked-In Retirement Account, or corporation can pay the pension if it remains open |
| Protection from creditors | Some protection from creditors | Strong protection from creditors |
There are similarities and differences between the two. The RRSP is an investment plan that allows you to save for retirement. You have complete control over choosing and structuring investments, empowering you to make decisions that align with your financial goals.
Contributions to an RRSP come from your funds, so you deduct the amount you contribute from your taxes. Financial institutions and brokerages manage RRSPs. There are typically no fees to set them up, but you may pay investment fees or trading fees if you have an online brokerage account.
An IPP is a pension plan that provides retirement income and is governed by federal and provincial legislation. The business contributes to the individual’s IPP. The company can deduct the contributions and expenses from its taxes. Alternatively, the individual can deduct the contributions from their taxes. These plans are more complicated to set up and are managed by actuaries. They must be reviewed regularly to ensure the plan will meet its objectives.
The government doesn’t allow you to maximize both. Contributions to your IPP will reduce your RRSP contribution limit, and contributions to your RRSP will reduce your IPP limit.
Which is best?
Maxing out your RRSP and Tax-Free Savings Accounts will give you tax-deferred growth and a tax deduction (for your RRSP), which are simple to set up and inexpensive to maintain. These plans work well for many business owners and professionals.
If you want a higher contribution limit, own a company that generates significant profits and are over 40, the IPP could be more beneficial to you in the long run.
How to Decide
An Individual Pension Plan is a valuable retirement tool, but it’s not the best option for everyone. Setting them up can be complicated and costly. Expert advice regarding IPPs is essential to the right decision for your financial future.
At MDL Financial Group, we’ve been helping incorporated business owners and professionals maximize their retirement plans with the right choices. We understand that navigating retirement planning can be complex, so we’re here to guide you. We’ll work with you to develop a plan to realize your goals. Contact us online or by calling us at 613-416-9649.
We look forward to working with you and helping you make the best decisions for your retirement planning. Don’t hesitate to contact us at MDL Financial Group to start the conversation.
If you like this article, here are three more you might enjoy:
https://mdlfinancialgroup.ca/swift-transition-from-accumulation-to-decumulation/
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