10 advantages of having an Individual Pension Plan for business owners and executives
Business owners are always faced with the challenge of planning for their retirement and retaining key executives in the company for the long-term. Faced with these dilemmas business owners may want to use an Individual Pension Plan (IPP), which is a registered retirement plan with a defined benefit. This means that you will know in advance the amount you will receive upon retirement.
IPPs have some resemblance to RRSPs in that you will only pay taxes on the amounts you withdraw usually at a later date, Investment earnings are tax-sheltered as long as they remain in the plan, and lastly, you may tax deduct your contributions and those made by the business.
In addition If you are 40 or older and earn more than $75,000 a year an IPP can be more beneficial than an RRSP because the contributions can be significantly higher than the RRSP’s allowable limit. This feature will allow you to save more for your retirement.
What will be the amount that you will receive at retirement?
Your retirement benefit from an IPP depends on many factors but the ones that stand out the most are the number of years you worked for the company, your salary level, and the years of contributing to the plan. When you retire you can receive a benefit directly from the IPP. You also have the option to purchase a life annuity or may be able to even transfer the IPP value into an RRSP or RRIF.
Top 10 advantages of an IPP
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Under certain parameters maximum contribution limits are considerably higher than for RRSPs.
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Income splitting between spouses is permitted at any time. Whereas with a RRSP you must wait until you are 65.
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You can buy back prior years of service upon the plan’s implementation allowing you to receive higher benefits and allowing larger deductions for the company.
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If you decide to retire early, the business can supplement the plan with an additional contribution.
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The amounts accumulated in an IPP cannot be seized by creditors whereas in some cases funds in an RRSP may be seized.
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Assets are not locked in for a connected person.
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Company contributions are deductible from its income, which can be helpful with profits that exceed the Small Business Deduction limit.
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Setup and administration costs are tax-deductible for the company.
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The IPP reduces shareholders’ equity, which can help facilitate the sale of the business.
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The costs of a loan that is needed to fund the IPP are tax-deductible.
Drawbacks to having an IPP
- The setup and administration costs for an IPP are material.
- You will have almost no new contribution room in your RRSP, and you will also not be able to make spousal RRSP contributions.
- The company is obligated to pay a salary rather than dividends.
- Additional contributions may be necessary if returns are insufficient to support the benefit amount.
Your personal situation needs to be considered to see if this exceptional savings tool can be used to your benefit.
Next steps
In conclusion, you are encouraged to consult with a professional financial advisor as there are a lot of financial planning considerations around IPPs and if it is the right fit for your retirement. In certain circumstances you may also want to consider group RRSPs, pension funds, and Voluntary Retirement Savings Plans (VRSPs) as alternatives to IPPs.
