Typically, while employed people may be able to fall back on corporate pension plans and the Quebec Pension Plan (QPP), it’s a trickier situation for small business owners. There are Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) available to business owners, but when the allotted annual amount has been maxed-out, what’s next?
Something to consider is an Individual Pension Plan (IPP) designed to offer the maximum benefits permitted under the tax rules and usually established for key members of the small business.
The amounts of contributions required to fund the pension are based on a set of assumptions calculated by an actuary. IPPs are most advantageous to business owners over the age of 49 who want to contribute more than the maximum amount of tax-sheltered money permitted for RRSPs.
CHARACTERISTICS OF IPPS:
- Each IPP must qualify for registration as a defined benefit pension plan under the Income Tax Act
- IPPs are beneficial for high income (typically over $120,000) owners of incorporated businesses and senior corporate executives
- RRSP contribution room will be limited because of a pension adjustment that is required to be computed
- Contributions are based on age, employment income, and actuarial calculations
- Contributions and administrative fees are deductible expenses for the corporation
- Contributions may not be made to an IPP for a spouse, but if the spouse works for the same employer, they could be added to the plan
- The assets of the IPP are locked in until retirement
- Interest on money borrowed to fund contributions is tax-deductible for the corporation
- Fees to maintain an IPP consist of the actuarial initial setup fees and triennial actuarial reports. They also include back-office fees relating to yearly accounting and government filing fees
- Allowable contributions are normally higher than RRSP limits
- The amounts within the IPP are generally protected from creditors, however, the benefits payable can be seized
- It may be possible for an IPP to begin paying a pension as early as age 50, or as late as the year-after the year in which the individual turns 71
For information on IPPs, contact your SLF Advisor.