One of the most important things business owners worry about is planning for retirement. Many business owners opt for an individual pension plan to solve this problem.
The Group Enroll team put together this guide to answer the question, “What is an IPP?” We will explain the structure of pension plans and how they can benefit you as a business owner or executive.
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What Is an Individual Pension Plan?
An Individual Pension Plan (IPP) is a type of retirement fund for business owners and executives. Similar to Registered Retirement Savings Plans (RRSPs), an IPP allows tax-free growth on retirement savings. The main difference between the two is that an IPP is a defined benefit pension plan, meaning you know in advance the exact amount you will have when you retire.
Similar to RRSPs, you will have to pay tax on withdrawals, but you can deduct IPP contributions from your overall taxable burden. IPP contributions depend on your age, income, salary level, and how long you have worked for the company that provides the IPP.
What Are the Benefits of an IPP?
Canadians can choose between an IPP and RRSP to save for retirement. However, IPPs have several benefits compared to RRSPs.
Higher Contribution Limits
One of the main reasons to use an IPP over an RRSP is the higher contribution limit. As of 2021, the RRSP contribution limit is 18% of the individual’s income, up to $27,830. IPPs do not have specific contribution limits as they are defined benefit plans and not contribution plans.
This means that business owners will have to calculate an appropriate contribution amount to provide them with the defined benefit at the time of retirement. RRSPs have higher contribution limits up to 40 years old, after which IPPs have higher contribution room.
More Varied Investments
The Canadian government strictly limits what kinds of investments RRSPs can contain. In contrast, IPPs have much greater flexibility in asset allocation and allow investments in private businesses and real estate.
A more diverse pool of assets makes retirement funds less resistant to losing value due to market conditions and serves as a hedge against inflation.
Spousal Income Split
Many married business owners wish to split incomes to lower the taxable burden on withdrawals. With an RRSP, you have to wait until you’re 65 to split income on any withdrawals. An IPP allows spouses to split income at any time they want.
One unique feature of an IPP is that it offers creditor protection, meaning that your assets are safe from lawsuits, collections, and other judicial proceedings.
All contributions to an IPP are tax deductible if the participant directly contributes money to the fund. Additionally, payroll tax does not apply to IPP contributions, and you can deduct setup or administration costs from managing the retirement fund.
One of the biggest downsides of an RRSP is that the entire fund is taxable after the second spouse’s death. If the participant is not married, the government will fully tax the fund after they pass away.
IPPs allow tax-free wealth transfer if your children or spouse work at your company on a T4 basis. In that sense, you can use IPP for tax-free wealth transfers to families.
IPP Frequently Asked Questions
If you want to know more about “What is an IPP?”, below are some of the most common questions we received.
Who Can Make an IPP?
Only a corporation can set up an IPP for a key executive or business owner and their spouse and children. The IPP must have a defined participant that receives T4 income from the incorporated entity in question.
Can I Make IPP Withdrawals Whenever I Want?
No. You cannot withdraw IPP contributions except when paying benefits. If the company terminates the IPP, you can use the funds to purchase an annuity or transfer the funds to another account.
Are IPPs Expensive to Manage?
IPPs are usually more expensive to set up and manage than RRSPs because they have a more complicated structure and allow a greater range of investment vehicles. Additionally, the Canadian government places strict regulations on IPPs, which means compliance costs are higher.
Who Regulates IPPs?
The Canadian Revenue Agency (CRA) regulates and oversees all IPP regulations and defines maximum contribution limits for each tax year and how you can invest IPP funds. Local provincial laws govern funding requirements.
What Happens to My IPP If I Lose Employment?
If your company terminates you or you otherwise lose your job, you can transfer the funds in your IPP to another registered account tax-free according to maximum transfer rules. You can receive cash for any transfers higher than the maximum amount, but this disbursement is subject to ordinary income taxes.
The Complete Guide to Group Pension Plans in Canada
Learn about group pension plans in Canada with our blog publication.
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Now that we’ve answered the question “what is an IPP?”, you’re ready to take the next step. Group benefits give employers the ability to provide benefits to employees, including group retirement savings plans like IPPs.
Fill out our quote form to receive competitive quotes from Canada’s top group benefits providers. You can also email our team at firstname.lastname@example.org or visit our office at 10 Great Gulf Drive, Unit 5, Vaughan, ON, L4K 5W1.