WHAT IS AN INDIVIDUAL PENSION PLAN?
An Individual Pension Plan (IPP) is a defined benefit pension plan. If you are a legal professional who owns a professional corporation, an IPP offers maximum tax relief and a maximum retirement pension. The result is an owner of a legal corporation no longer has to rely on Registered Retirement Savings Plan’s (RRSP’s) performance to provide for a long and happy retirement. That’s because IPPs also offer guaranteed lifetime income and any surplus in the plan belongs to you.
WHY ARE IPPs SO POPULAR?
Incorporated legal professionals like the fact that the pension they will receive are known well in advance of their retirement date. They also like that at age 50 the maximum contribution to an IPP is $7106 dollars higher than a traditional RRSP and is also creditor protected. They can also include past service to an IPP for years they did not contribute all the way back to 1991. This can significantly increase what can be contributed to the plan along with increasing their tax deduction. IPP’s can also be set up for the legal professional’s spouse if the spouse is an income –earning employee of the corporation.
Set up Fees are also tax deductible to the corporation.
Individual Pension Plans and the Legal Professional Corporation
1. Includes a spouse or common-law partner as defined by the Income Tax Act (Canada).
Tax Saving Opportunities For:
High Income Earners
Legal professional corporations who have income over $130000 will pay taxes over the 46 percent rate for each dollar they earn over that amount. If they plan to maximize their RRSP contributions anyway this is an excellent vehicle to provide additional tax deductions and save for retirement while making the most of their tax bracket.
Sale of a Business
Most law firms are sold to family members or partners. The proceeds from these types of asset sales are treated as taxable income. By setting up an IPP now using terminal funding, a deduction can be created against this income.
The legislation requires funding projections to be based on a retirement at the age of 65.
However, anytime after attaining age 60, a member of an IPP can retire and supplement the benefits provided in the plan by adding unreduced early retirement
benefits, cost of living increases and bridging benefits. These early retirement benefits can provide a significant additional tax deduction for the company.
■■ Legal professionals who own a professional corporation
■■ Individuals age 40 or older
■■ People who earn employment income reported on a
T4 of at least $132,300 from the company sponsoring
The Individual Pension Plan
■■ Request a quote from your advisor showing the
deposits that can be made based on your age and
length of service while incorporated
■■ Compare the benefits of an IPP to an RRSP
■■ Work with your advisor to establish an IPP if you
determine it is right for you
Contribution comparison in 2012 and Difference
Age IPP ($) RRSP ($) Difference ($)
40 24,926 22,970 2,476
45 27,380 22,970 4,930
50 30,076 22,970 7,106
55 33,037 22,970 10,587
60 36,289 22,970 13,839
65 39,862 22,970 17,412
Source: Westcoast Actuaries. For illustration purposes only.