Consider an Individual Pension Plan (IPP)

If you are running an incorporated business you may be in financial position to supplement your RRSP with an IPP, which is a defined benefit pension plan. The IPP offers both maximum tax relief and a maximum retirement pension.

To qualify for an IPP, you must:

• Have employment income reported on a T4;
• Be an employee of an incorporated company; and
• Own at least 10% of the shares of the company or be paid at least 2.5 times the maximum CPP pensionable earnings. CPP pensionable earnings for 2013 are $51,100 so the minimum earnings for a non-connected member of an IPP is $127,750. 

There can be significant advantages to an IPP including the following:

• IPP contributions and expenses are fully tax-deductible to the business. If you borrow money or amortize the past service cost, you can deduct the interest charges.
• Pension benefits are protected from creditors under pension legislation.
• Extended contribution period: A company has 120 days after its year end to make an IPP contribution.
• Ownership of plan assets: At retirement, the IPP member owns any actuarial surplus. It may be used to upgrade pension benefits or the plan holder may pass it on to his or her spouse, heirs, or estate.
• Guaranteed lifetime income to IPP member and their spouses: This pension plan offers a predictable retirement income. An actuary determines the current annual cost of the future retirement income. Spouse pension benefits may be upgraded to 100% when the member retires or dies. The company is on the hook for this money.
• Additional benefits: Full consumer price indexing, early retirement pension with no reduction, and bridge benefits can be structured to fortify gaps left by other retirement income pools like the CPP or OAS.
• Annual minimum withdrawal amounts will be required from IPPs once a plan member is 72. These amounts will be based on current RRIF rules.
• Contributions to an IPP related to past years of employment will have to come from RRSP or RPP assets or by reducing RRSP contribution room, before deductible contributions can be made. These provisions apply to IPP past service contributions made after March 22, 2011.

Excerpted from Essential Tax Facts. © Knowledge Bureau, Inc. All rights reserved.