Are mutual funds better than stocks? Are stocks better than ETF's? Are Treasury Bills better than CD's? Well… is a hammer better than a saw? Is a belt sander better than a pair of pliers? Is a screwdriver better than a wrench?
The fact is, all of these tools are designed for specific jobs. Each has strengths and each has weaknesses. You will get the best result if you use the proper tool for the particular job.
Incorporated business-owners and high income executives will want to keep the above in mind as they read this column – an introduction to an outstanding retirement-funding tool available only to business-owners and executives.
First, let’s have a quick reality check – ongoing market uncertainty along with the onerous new tax rules proposed by the Trudeau government has many Canadian pre-retirees very concerned, particularly incorporated business owners.
Of course, those whom have years to go until retirement have much less to be concerned about, as they understand that left alone, money and time can do magical things together. It’s called compounding.
However those nearing retirement have much more to be concerned about, particularly if their income is primarily dependent upon RRSP savings. RRSP’s are contributory plans, with investment risk falling squarely on the shoulders of investors. Defined benefit plans are vastly different. With defined benefit plans, the benefits in retirement are known at the outset, and the risk of meeting those defined retirement benefits falls squarely on the shoulders of employers.
So here’s the deal with IPP’s…
If you’re over 45 and earning a six figure income from a corporation you may want to consider looking beyond a Registered Retirement Savings Plan (RRSP) to build your nest egg. For the right person, an Individual Pension Plan (IPP) can generate significant tax advantages beyond those provided by a RRSP. Additionally, an IPP can also produce higher pension benefits.
An IPP is a defined benefit pension plan – if you are a business owner or senior executive, an IPP offers both maximum tax relief and a maximum retirement pension. The result? You won’t have to rely solely on your RRSP performance to provide a long and financially secure retirement. That’s because IPP’s also offer guaranteed lifetime income. Any surplus in the plan belongs to you. This is an advantage IPP’s have over other pension plans where any surplus stays in the fund and is used by the company to pay for benefits for other members of the plan.
Is an IPP right for you? Maybe. Maybe not. Many factors must be considered.
Do you qualify for an IPP?
If you are 45 or older, running your own incorporated business and earning a six-figure income, you may be in a financial position to consider the tax deferral advantages that exist with an IPP. If you run the business with your spouse, you both may be ideal candidates.
To qualify for an IPP, you must:
- Have employment income reported on a T4
- Be an employee of an incorporated company; and
- Be age 45 or older and earn an income of at least $100,000 from the company sponsoring the IPP.
What are the advantages of an IPP?
- Annual maximum contributions are considerably higher than RRSP maximums. This advantage increases with age.
- Pension benefits are protected from creditors under pension legislation, unlike most RRSP’s.
- IPP contributions and expenses are fully tax deductible to the business.
- If you borrow money or amortize the past service cost, interest charges are fully deductible.
- An IPP provides a predictable and guaranteed lifetime retirement income.
- As you age, contributions to the plan increase. The amount depends on your salary, age, and years of service with the company.
- If past service is being provided and you have contributed to an RRSP after 1990, you must transfer your RRSP funds to the IPP. The company then pays the balance of the cost to provide for past service from 1991.
- Furthermore, at retirement, you are allowed to enhance your IPP to allow for early unreduced retirement, and if desired, indexation of retirement benefits. These additional benefits are all funded by the corporation, on a tax deductible basis.
- IPP’s, in certain circumstances, provide an excellent tool to remove surplus funds from one’s corporation in a tax-advantaged manner.
- Finally, in family-owned businesses it may be possible to structure a significant tax-free intergenerational transfer of wealth via an IPP.
No need for you to memorize these details, as IPP actuaries will conduct a no-cost, no-commitment assessment on your particular situation and provide you with a detailed illustration as to how an IPP would work for you. Simply speak with a financial advisor who is knowledgeable on IPP’s.
IPP’s have drawbacks
While ideal savings vehicles for many people, IPP’s are not for everyone. It’s important to remember IPP’s are defined benefit pension plans (with higher limits) and not RRSP’s. At retirement, or if you leave the company or decide to wind up the plan – any surplus that is not required to pay for the promised benefits is paid to you in a lump sum and is fully taxable (it may be possible to move part of this surplus back into your RRSP without tax). Also, with IPP’s there are nominal annual fees for ongoing actuarial and administrative services that don’t apply to RRSP’s.
Before making any decisions, speak with your financial advisor and/or tax accountant to be sure you understand all the benefits and potential drawbacks to IPP’s.
Please do not hesitate to communicate with the writer if you would like additional information on this topic.
Joel Attis is a Senior Financial Advisor with AttisCorp Wealth Management and IPC Investment Corporation. Comments or questions may be submitted to Joel at email@example.com, or he may be reached at 855-1155.