October 2005

IPP’s – Super size Your Contribution!

If you are over 40, have worked for a company for several years, and have employment income over $100,000, an Individual Pension Plan (IPP) may be the next step in planning for your retirement. An IPP is essentially an upgrade to your RRSP, where an incorporated employer makes contributions based on actuarial studies that ensure there is sufficient funding for a pre-determined pension benefit. The main benefits to the employee are that he or she can contribute more towards an IPP than to an RRSP, the future benefit is defined, and assets held in the IPP are creditor proofed. If the employee has been employed for several years, he or she can catch-up for past service contributions back to 1990.

In addition, the company can make contributions up to 120 days after the year-end. Any administration fees incurred are deductible by the corporation (vs. no deductions for RRSP’s) and there is no pre-set deduction limit.

To illustrate the benefits of an IPP, take a hypothetical situation where an individual, who is 50 years old, has been an employee with a certain company since 1991 and has a salary of $100,000. Using the statutory yearly rate of return of 7.5%, maxing out his or her IPP contribution room and RRSP will accumulate approximately $1,729,829 in registered retirement assets by the age of 65, as compared to $1,143,622 through RRSP contributions only. Upon implementation of the plan, the corporation can make catch-up contributions up to $96,187 on behalf of the employee for past service back to 1991. In year 1, the annual contributions to an IPP may exceed RRSP contributions by $5,867 ($22,367 to an IPP vs. $16,500 to an RRSP). By year 14, the annual contribution to an IPP would exceed an RRSP contribution by approximately $23,647 ($57,869 vs. $34,222). The total additional contributions would amount to $282,861 and would accumulate to $586,207 at the yearly rate of return of 7.5%.

An IPP may be worth considering if a large bonus is going to be paid out to an employee. If the employee does not require all of the bonus amount for personal living costs, it may be possible to shelter a large portion of the bonus by way of a catch-up past service contribution. However, it should be noted that once the IPP is registered, the pension is locked in, contributions are mandatory, RRSP contributions are restricted, there are no spousal contributions, and costs are typically higher to administer the plan.

Readers are urged to consult their professional advisors prior to acting on the basis of material in this newsletter. If you have any questions regarding the content of this newsletter, please contact Crawford, Smith & Swallow. Copies of the newsletter in PDF format are available on our website.