What is an Individual Pension Plan (IPP)?

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With all of the investment options available, it’s completely understandable you need a bit of help figuring out what they are and what their purpose is. You don’t need to venture much further from the category of retirement accounts to see that there are numerous options for you. 

Most of the options are for regular employees or individuals who are saving for retirement.  However, there is another option for business owners called the Individual Pension Plan. This article will get into the details about what this plan is, how it works, and what some advantages are.

What Is an Individual Pension Plan?

An individual pension plan is a retirement account that is specifically meant for business owners and high-income employees.  It offers the benefit of both tax-advantaged retirement savings and tax deductions each year.

Who Is the IPP For?

The IPP is for, as mentioned, business owners.  However, the below groups may benefit as well.  We’ll get into more details in the next section.

–          Business owners – the assumption here is that these individuals would have higher than normal earnings from owning businesses.

–          Incorporated professionals – some self-employed but high-earning individuals may benefit from some of the advantages depending on their work and income.  Medical professionals, certain types of lawyers, and therapists fall into this category.

–          Individuals over age 40 – those over this age may find an IPP to have tax advantages and retirement savings benefits over other retirement accounts such as the Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).

–          Individuals with $100,000 + in T4 earnings – while an IPP can be opened by those with lower earnings, those above this level may also find benefit in exploring an IPP.

How Does an IPP Work?

The IPP is similar to an RRSP in that they both offer individuals tax-advantaged savings for retirement.  However, an RRSP is made up of contributions from an individual and sometimes an employer and has limits to the amounts that can be contributed.

Typically, an IPP is opened for individuals who have around a 10% stake in the business or are high-income, and they are contributed by the company with corporate funds.  These contributions are deductible, and they are planned as part of the individual’s compensation package.

When you start receiving income from your IPP, it is considered regular income and taxed at the appropriate rate.

Legally, an annuity must equal at least 2% of the average of your three highest annual salaries, so one of the major benefits of an IPP is the ability to predict your retirement income.

The IPP also allows for several advantages over an RRSP.  The main advantage is that the IPP contribution room is not only higher from the start but it also increases every 5 years.  At age 65, the contribution room is 68% higher than that of an RRSP.

An RRSP is great for the average earner, but high-income individuals would not be able to maintain their standard of living if their retirement savings were limited to $27,000 per year.

It should be noted that, while any employee of an incorporated company earning a T4 can apply for an IPP, those making less in taxable income may find it difficult to reach even the RRSP maximum let alone realize the advantages of the IPP’s increased savings limits.

Regular employees may also not be able to even qualify under a company’s rules for an IPP because of the significant costs involved in setting it up.

Once members of an IPP retire, they can choose a monthly pension, an annuity, a Life Income Fund, or a Locked-In Retirement Income Fund.  If the annuity is chosen, this benefit can even include a spouse, though the payments would be reduced both in amount and length of time depending on the options of the plan.

What Are the Advantages?

As mentioned, the IPP has several advantages for those individuals for whom it was designed

–          An IPP provides predictable income upon retirement

–          Contributions are not locked in for a connected person

–          Returns are tax-sheltered

–          IPP funds cannot be seized while RRSP funds can sometimes be seized

–          Up to 68% higher contribution limits than an RRSP

–          Spouses can benefit during retirement

The sponsor company will also see distinct advantages over RRSP contributions:

–          Contributions are tax-deductible

–          Costs of setting up the account and managing it are tax-deductible

Summary

The IPP is certainly only for a very particular group of people.  Business owners and significant shareholders (i.e., a connected person) can realize incredible benefits to having an IPP in their retirement portfolio. 

Not only will the income at retirement be predictable, but the amount a sponsor company can contribute increases every 5 years.  Individuals who may need some catching up on retirement can also benefit from other individual retirement accounts, though this will depend on the company’s benefits programs.

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.