When individual pension plans beat RRSPs

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By Colleen O’Connell-Campbell

Individual pension plans stand out as a sterling retirement savings option for some demographics of entrepreneurs and incorporated business owners, particularly those with T4 income of more than $100,000 and over the age of 40.

An IPP offers a robust alternative to the more common registered retirement savings plan (RRSP). But what exactly is an IPP, and why is it worth a spot in the financial strategies of a seasoned entrepreneur?

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An IPP is a tax-sheltered retirement savings plan specifically designed for incorporated business owners and professionals. You might think of it as a supercharged RRSP, offering higher contribution limits and additional benefits tailored to the needs of successful individuals who have made significant strides in their careers.

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The primary allure of an IPP lies in its enhanced contribution limits, which often exceed those of RRSPs. This feature becomes increasingly valuable as one grows older, allowing for accelerated retirement savings.

Furthermore, IPP contributions are tax deductible and may offer creditor protection, adding a layer of security to your hard-earned wealth.

When is an IPP ideal?

There are several factors that make an IPP appealing to people in certain situations:

1. Age and income: The IPP is particularly advantageous for those older than 40 with a T4 income exceeding $100,000. While available to younger individuals, the benefits become more attractive as one enters this demographic.

2. Incorporated professionals: Those in fields such as law, medicine and accounting, where incorporation is common, find IPPs especially beneficial.

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3. Family business and wealth transfer: For family-owned businesses, IPPs can be instrumental in intergenerational wealth transfer, ensuring the continuity of financial security.

4. Exit strategies: IPPs can be a key element in a cash-rich business exit strategy, complementing other assets such as proceeds from business sales, real estate portfolios and corporate investments.

IPP vs. RRSP

While both IPPs and RRSPs offer tax-deferred growth, IPPs stand out in several ways:

1. Higher contribution limits: IPPs allow for higher employer contributions compared to RRSPs, making them ideal for high-income earners looking to maximize their retirement savings.

2. Defined benefits: Unlike RRSPs, IPPs provide a defined benefit after retirement, offering a predictable income stream.

3. Tax efficiency for corporations: Contributions to an IPP are tax deductible for the corporation, enhancing the overall tax efficiency of the business.

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Setting up an IPP involves navigating legalities and specific requirements, making it essential to seek professional advice. This complexity, however, should not deter savvy investors and entrepreneurs from exploring IPPs as a viable option.

And for those who remember the band Naughty by Nature’s 1991 hit O.P.P., an IPP might just be the new catchphrase for forward-thinking business owners as we head deeper into tax season. Allow the catchy tune to underscore the IPP’s relevance to a gen X (and older) cohort of entrepreneurs and professionals.

Colleen O’Connell-Campbell is a wealth adviser with RBC Dominion Securities and host of The Cash-Rich Exit Podcast.

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