Individual Pension Plans
Individual Pension Plans (IPPs), offer business owners, executives and incorporated business professionals a way to greatly increase their retirement savings. They enable you to invest annual contributions that go well beyond what you can put into an RRSP.
How IPP's Work
IPPs are very complex, so you really need to look at them on an individual basis to determine if one is right for you or your company.
Here are some interesting points about IPPs:
- You don't need to pay the same investment every year, but you must make sure that there is enough money in the plan so that the promised benefit is available to the recipient.
- The cost of the IPP is a direct, tax-deductible expense for the business.
- When you set-up an IPP you often have the ability to fund it back for many years, which lets you start by putting in substantially more money than your normal annual contribution amount.
- There is no minimum to get an IPP started.
- IPPs costs, on average are $3500 to set-up.
Major benefits of IPPs
An IPP is not as flexible as an RRSP, as you cannot draw the money out at any time and are expected to ensure that enough money is in the plan to pay out the pension benefits when plan members retire.
IPPs have many advantages for people who are at least 40 years old with a reasonable amount of substantial income.
The greatest benefit is money.
IPPs will help some people make substantially greater contributions than they might otherwise do. More contributions means they will have more money compounding - tax deferred - until they retire. For some people the difference at retirement could be millions.
IPPs have non-financial benefits as well.
They are creditor protected, meaning your retirement is covered even if you or your business goes into bankruptcy. IPPs can also be used to attract high level employees who would normally feel that they can't leave their current job because of their pension plan. Expenses associated with the IPP are fully tax deductible to your company, while the benefit to the employee is not taxable.
In addition to your regular contribution amounts, it is also possible to make voluntary contributions.
For example, a dentist who is only able to put $25,000 into her IPP because she had just incorporated but has $1 million sitting in an RRSP could make an additional voluntary contribution and transfer the $1 million from her RRSP into the IPP if permitted.
The funds are still treated like an RRSP and can be taken out at any time. However, they are now creditor protected on top of that you can write-off the 2 % management fees as a business expense.
With the benefits come serious risks
IPPs also come with great risk, they must be structured properly. If they are not structured properly CRA can force them to be unwound which would result in significant cost and taxes.
For a plan to remain registered it must at all time satisfy four criteria:
- 1. It must comply with all laws and regulations governing Registered Pension Plans and all filings must be up to date.
- 2. The company that sponsors the plan must - prior to the creation of the plan - have existed for a reason other than to simply set-up an IPP.
- 3. There must be a bona fide employment relationship between the plan member and the company.
- 4. When assets from another defined benefit plan are transferred to an IPP the member of the plan must expect that his earnings at the new company will be similar to the earnings from his previous employment.
If you don't meet these four criteria you run the risk of having your IPP deregulated.
"Under Revenue Canada's GAR rule, if Revenue Canada deems that you did something for the purpose of just saving tax they can basically disallow it. With Revenue Canada you are guilty before you can prove yourself innocent, unlike anything else in our system," said Merrick.
Parts of this article were based on information from The Essential Individual Pension Plan Handbook by Peter J. Merrick, published by LexisNexis. ISBN 978-0-433-45400-7. And www.canadaone.com/ezine/june_2007/ipps.html