Only you know what you want your retirement to look like. If your practice is incorporated and you are looking for a more significant nest egg with even better income tax protection than a Registered Retirement Savings Plan (RRSP), an Individual Pension Plan (IPP) could be the answer.
What is an Individual Penison Plan and how does it work?
An Individual Pension Plan is a defined-benefit pension plan that is typically set up for just one plan member and is designed for business owners like you.
With a similar income structure to an RRSP, an IPP has better tax protection and a much higher corporate contribution limit. Tax-deductible contributions are made directly from your corporation to the IPP. The assets of the IPP are invested and grow tax-sheltered. When you retire, the IPP provides you with a lifetime monthly pension or you can further defer taxes by making a lump sum transfer of the value of the IPP to an RRSP or LRIF/RRIF1.
What are the requirements of an Individual Pension Plan?
- Your business is required to be incorporated (professional, regular, personal services corporation)
- Some or all of your income from your corporation must be paid to you as T4 employment income
Should incorporated dentists consider an IPP?
An IPP can create a significant tax-planning opportunity for you and your business because the corporation can make tax-deductible contributions and you can benefit from tax-deferred growth inside the plan. Both of these benefits help with the Canada Revenue Agency’s (CRA) rules on passive investment income: the tax deduction helps reduce the corporation’s active income, and the tax deferred growth lowers corporate investment income.
In many provinces, IPPs now offer enhanced flexibility with no locked-in requirements and fully flexible funding that is responsive to your cashflow needs.
This enhanced flexibility is a significant improvement for incorporated professionals who currently have, or would like to setup, an IPP.
Higher Tax-deductible Contributions
- Higher Annual Contributions– the IPP maximum contribution rate for 2023 increases from 18% at age 39 to 29% at age 65 whereas the RRSP contribution rate is 18% for all ages
- Flexibility in making contributions to IPPs
| AGE | IPP | RRSP2 | THE ADVANTAGE OF AN ADDITIONAL IPP |
|---|---|---|---|
| 45 | $ 32,300 | $ 27,830 | $ 4,470 |
| 50 | $ 35,500 | $ 27,830 | $ 7,670 |
| 55 | $ 39,000 | $ 27,830 | $ 11,170 |
| 60 | $42,000 | $ 27,830 | $ 14,970 |
| 65 | $ 47,300 | $ 27,830 | $ 19,470 |
Contributions — Past Service2
Tax-deductible Corporate Contributions
- Flexibility to make contributions – immediately or amortised over a number of years
- Higher if the plan member has unused RRSP contribution room
- Increases with age and past service
| AGE | 45 | 50 | 55 | 60 |
|---|---|---|---|---|
| Past service contribution | $ 115,600 | $ 163,300 | $ 215,700 | $ 273,300 |
Tax-sheltered Savings2
- Significantly higher tax-sheltered savingsrelative to an RRSP
- Tax savings & growthof these savings over time
- Ability to save moreand the growth of these contributions tax sheltered
- Intergenerational wealth transfer strategies available for family IPP’s where children of owners are earning T4 income from the corporation
| AGE | 50 | 55 | 60 | 65 |
|---|---|---|---|---|
| RRSP | $ 232,200 | $ 552,700 | $ 1,047,800 | $ 1,799,100 |
| IPP | $ 479,600 | $ 1,046,700 | $ 2,016,800 | $ 3,633,500 |
| IPP Advantage | $ 247,400 | $ 494,000 | $ 969,000 | $ 1,834,400 |
Terminal Funding2
Retiring early (prior to 65)
- Additional tax-deductible contributions
Additional IPP benefits of retiring early
- Bridge Pension (CPP/OAS) to 65
- Decreased reduction for earlier start of pension
If you would like additional information about how an Individual Pension Plan can support your retirement plans, please contact our Investment Advisors3 at
1.800.561.9401 or investments@cdspi.com. You can also go online to speak with an advisor.
1 A Portion may have to be paid in cash (taxable) on windup
2 Contributions are tax-deductible to the corporation; All amounts are estimates only and based on the following:
a. Maximum funding rules applicable for funding of designated pension plans based on tax rules in 2021 (ITR 8515)
b. T4 Earnings in each year that produces maximum IPP benefit, i.e., $162,278 in 2021
c. Setup at age 45 with 15 years of past service and no RRSP contribution room, funding flexibility allows funding to be immediate or spread over a number of years
d. Canadian Controlled Private Corporation (CCPC) eligible for Small Business (SMB) Tax Credit; Corporate Income of $350,000 & Retained Earnings of $300,000.
3 Advisory services are provided by licensed advisors at CDSPI Advisory Services Inc. Restrictions may apply to advisory services in certain jurisdictions.
The content of this article is intended for information purposes only and to facilitate discussion only. All amounts are estimates only and are based on the assumptions made.
This information is not intended to offer taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law.