Best Retirement Strategy with Individual Pension Plans (IPPs)

Individual Pension Plans (IPP’s) for Incorporated Businesses

An IPP is a registered and defined-benefit (DB) pension plan which is usually set up for one person. It provides an added benefit for high-level executives and incorporated business owners. IPP’s are approved by the Canada Revenue Agency (CRA) and offer great savings solutions for individuals who are 40 years or older, have a T4 income of more than $100,000 and have factually maximized their pension and RRSP contributions. You can think of an IPP as an RRSP upgrade. It is designed to cater to high-income earners who are looking for tailor made packages because their requirements are not met by the RRSP setup.  Comparison of RRSP and IPP: Suppose you’re a 45 year-old executive who has worked for the same organization since 1991 and have an average T4 income of $100,000 per year. If you have an IPP along with an RRSP and you decide to max-out both, assuming a yearly rate of return of 7.5%, then at retirement you will have $4,796,518 in registered retirement savings. Using this tax solution, you will have a yearly benefit of $362,549 when you’re 69 years old which is fully indexed to the consumer price index. Now, if you just used an RRSP for the same time period i.e. from age 45 to 69 than you would only save $ 3,226,413 in tax-sheltered retirement assets.

Introduced by the Federal Government in 1991, the IPP is a tax-avoidance structure with annual contributions fully deductible by the IPP sponsors or corporations. These contributions are also a non-taxable benefit for the beneficiaries until money is withdrawn from the plan. If you’re running an incorporated business, an IPP will let you invest hundreds of thousands of tax-deferred income dollars from your business into the IPP structure. This will ultimately give you non-taxable interest which will compound until you retire.  Annually, this nest egg would give you a retirement income of $243,871 from age 69 onwards. This makes it very clear that an IPP implemented with an RRSP provides an additional $118,678 in annual income as compared to only utilizing the RRSP.