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More Retirement Savings (Posted On: Saturday, November 06, 2010)

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Yes, it is possible to get up to 65% more into your retirement savings plan than with a regular RRSP.  How is this possible?   The answer is with an individual pension plan (IPP) set up for retirement income purposes.  The rules for these plans allow for the accumulation of greater assets than compared with a standard RRSP.  An IPP is a defined benefit pension plan and unlike an RRSP it sets your income at retirement.

An IPP is similar to an RRSP in that it uses an investment account that accumulates over time to provide retirement benefits, however an IPP will provide certain guarantees over and above a traditional RRSP.  For example, the amounts saved in an IPP are locked in and may be used only for retirement purposes whereas a standard RRSP can be withdrawn at any time and taxed.  Also the plan’s contributions are determined by a series of Actuarial Valuation Reports which ensure sufficient assets at retirement.

Who can take advantage of the IPP?

The best candidates for an IPP are business owners, their families, key executives and professionals with professional corporations the only stipulation is that the sponsoring company must be incorporated.

The individuals who often gain the greatest benefit from an IPP are business owners, incorporated professionals and certain executives, age 40 and over, and earning over $124, 722.00 in T4 or T4PS income.  However, it should be noted that an IPP may also be established for candidates with lower earnings.

What you need to know

• Assets are locked in and may, in almost all circumstances, only be withdrawn during retirement.
• There is little contribution flexibility. 
• An IPP affects your RRSP room in the year of set-up.  Contributing to both can cause over contribution and subsequent penalties.
• Your earnings (past and current) are used to determine the amount you can contribute.  This can mean large sums of money being deposited well over and above what a standard RRSP can allow.
• Contributions are graduated by age, therefore the older you are, the more you can contribute.
• IPP contributions first exceed RRSP contributions around age 40.  In other words, after age 40 an IPP’s allowable savings begins to far exceed that of an RRSP.
• The annual contributions are compounded at a 7.5% net annual rate of return and a valuation is required to be completed every three years to ensure the plan stays on track and if 7.5% rate of return has not been achieved then a catch up contribution from the corporation will be required.  However, this tax deductible additional funding can be made over 5 years.  Conversely, if a surplus is generated a contribution holiday may be required.
• Once you decide to retire you will have a choice of retirement vehicles to choose from (LIF, annuity, or a LRIF)
• Your trusted accountant, Lawyer and Financial advisor should be consulted, along with the actuarial firm you intend to use to establish an IPP.

Key benefits of an IPP

• Contributions are tax deductible(to the corporation)
• An excellent way to increase retirement assets and have your company make large tax deductible contributions
• Safer investment rules and limitations compared to the standard RRSP
• Allows for additional tax deductible contributions to be made by the company should the rate of return on plan assets be less than 7.5% per year.
• Provides pre-determined retirement amounts and benefits
• No deemed disposition of plan assets upon death.  Plan assets remain in the plan to provide benefits to your surviving family members.
• All costs associated with the pension plan are tax deductible to the company.
• An IPP has key succession planning features.
• An IPP can allow you to retire earlier and split your income with your spouse.  An IPP can allow this as early as age 55.


So, what does this all mean? 

It means every successful business owner or professional should at least be considering an IPP.  An IPP allows the owner to know how much they will have when they retire, creates tax deductions for the corporation, allows the company to make up investment losses and mandates a prescribed annual rate of return of 7.5%.  If the owner should die prematurely, the funds can be paid to the spouse and transferred to his or her RRSP as locked in funds.  If there is no spouse, funds are payable in cash to a beneficiary or the estate.  Also, the spouse or the beneficiary will receive 100% of the value, not a reduced value (66.7%) which can happen with other pension plans.  Finally, and perhaps the best reason to investigate is the fact that you can save so much more for retirement in a tax effective manner as compared with a RRSP.  In other words, the benefits are certainly worth considering and I strongly suggest a simple conversation with your financial advisor to go over the pros and cons of such a plan to see if one could benefit you. 


Michael R. Horne is a financial advisor with London Life and Freedom 55 Financial.  He can be contacted at michael.horne@f55f.com or 705-888-6327.  Also you can check out his web-site.   

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