Individual Pension Plans: A Strategic Retirement Solution for Business Owners

Introduction: An Individual Pension Plan (IPP) is an increasingly popular retirement vehicle, particularly for owners of private corporations. Its appeal lies in offering retirement benefits akin to those enjoyed by government employees and larger organizations. However, it’s crucial to understand that IPPs are available only to incorporated entities, excluding partnerships and sole proprietors.

Key Features of an IPP:

Defined Benefit Plan: An IPP is a defined benefit pension plan, providing a predictable and stable income in retirement, based on years of service with the corporation.

Corporate Funding and Taxation: The IPP must be funded by the corporation employing the plan member. The individual should draw some employment income (evidenced by T4, T4A, or T4PS forms) to justify the plan’s contributions. The IPP is particularly advantageous for individuals with employment income near or exceeding the maximum RRSP deduction limit, which is 175,333 in 2024 ($171,000 in 2023).

Tax Benefits: Contributions made by the corporation to the IPP are tax-deductible for the company, while the individual is taxed only upon drawing the pension. The plan’s associated costs, such as setup fees, actuarial calculations, and portfolio management fees, are also deductible for the corporation. This includes interest on borrowed funds for the IPP, a benefit not available with traditional RRSPs.

Enhanced Contribution Limits and Retroactive Benefits:

Higher Contributions than RRSPs: The IPP allows for larger contributions than permitted under RRSP rules, with these contributions potentially increasing as the business owner ages.

Retroactive Funding: The IPP accommodates past services (dating back to 1991), providing options for immediate deductions or amortization for up to 15 years. This aspect can significantly enhance the retirement plan while offering substantial deductions for the corporation.

Setting Up an IPP: To initiate an IPP, the corporation establishes a registered pension plan in the name of the individual. Contributions are determined by actuarial calculations and can include a lump-sum contribution followed by annual payments. The plan typically targets a 7.5% ROI, and if this is not met, the company can make additional contributions.

Accessing Pension Funds: The pension from an IPP can be accessed as early as age 50, with several options available:

Life Annuity: Provides a lifetime payment, with a portion potentially going to the surviving spouse and options for minimum guaranteed payments to the estate.

Transfer to LIRA, LIF, or LRIF: These are locked-in versions of RRSPs and RRIFs, offering flexibility and estate benefits.

Direct Payment from IPP: Allows for immediate or deferred pension payments, with the plan transferring to a designated beneficiary upon death.

Considerations and Potential Drawbacks:

Ongoing Funding and Lock-in Provisions: The IPP requires consistent funding, and a portion of the funds remains locked in post-retirement.

Actuarial and Compliance Costs: Regular actuarial assessments and compliance with CRA regulations incur ongoing costs.

Conclusion: While the IPP offers significant tax benefits and a secure retirement through a defined benefit plan, it’s a complex vehicle that demands a collaborative approach involving your tax accountant, investment advisor, and estate lawyer. At Shajani CPA, we have the expertise to guide you through setting up and managing your IPP, ensuring it aligns with your overall financial and retirement goals. Let’s work together to secure your financial future.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2023 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.