What is an Individual Pension Plan?
An Individual Pension Plan, or (“IPP”), is a defined benefit pension plan registered with the Canada Revenue Agency. However, unlike most pension plans that involve tens, hundreds, or thousands of members, IPPs are typically set up for one person – the business owner. For this reason, IPPs are sometimes referred to as a “business owner’s RRSP.” IPPs can also be set up for senior executives with a longstanding tenure in a company.
Benefits of an IPP:
- Potential for additional contribution room over and above an RRSP
- IPP contributions made by the business, plus administrative costs, are tax-deductible
- Significant tax-planning opportunities for the individual and the business with the option for lump-sum contributions under specific circumstances
- Creditor-protected
Who is an IPP suited for?
- Age 45-60 (roughly)
- 10 years or more owning the business or in an executive role with the business
- Consistent T4 (salary) earnings of at least $100,000/year
- Not a member of another pension plan
- The business must be incorporated
NOTE: just as dividend income (T5) does not increase RRSP contribution room, the same goes for IPP eligibility. Income in the form of a salary must be present.
Other IPP facts:
- IPP contributions made by the business are not included as taxable income on the individual’s tax return; however, a pension adjustment is reported to reduce RRSP room.
- IPPs come with significant set-up costs and ongoing servicing and managing costs. As the plan sponsor, the business is responsible for maintaining the plan contributions based on the actuary reports.
What happens to the IPP upon retirement?
Similar to other pension plans, the plan member has some options at retirement:
- Receive a monthly pension from the plan, similar to a defined benefit pension plan
- Buy an annuity from a life insurance company
- Transfer to another locked-in plan
This is a basic overview of an IPP – before choosing to proceed, you should consult with your tax and/or legal professionals. Once appropriateness is determined, an actuary is used to construct and oversee the plan. For further information on Individual Pension Plans, or to get started, please contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca.
DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.