A few weeks ago, my colleague David Lloyd wrote about how much money is needed for retirement. Most people have a number in their head. Maybe it’s sufficient. The next question is, how do you make sure you meet this number?
As a business owner, you have a unique savings opportunity you may not even know about. It’s called an Individual Pension Plan.
Imagine for a moment, the federal government gave you the opportunity to create a corporate pension plan, just for you. A plan that would provide you with dependable income in retirement – much like that enjoyed by teachers or civil servants – funded by your corporation.
How would you design the plan? Maybe something like this?...
Your company would make annual contributions on your behalf – fully tax deductible to your business. And, because you’re successful and you want to continue your standard of living in retirement, you’d want to make larger contributions – say, up to 65% larger - than what your RRSP allows.
Higher contributions. Bigger tax deductions. More retirement capital.
You’d also want the contributions to grow tax free while they’re invested – just as your RRSP contributions currently do. But, wouldn’t it also be nice if the management fees for investing your contributions were also tax deductible. After all, these fees add up and this you could save potentially hundreds of thousands of dollars over time.
No more wild market movements
Naturally, you wouldn’t want your pension plan to suffer the wild gyrations of the stock market like an RRSP often does. After all, this is your retirement money. Instead, you’d want your plan be managed conservatively, earning, say, a steady 7.5% return each year.
But let’s say for some reason you didn’t quite earn the 7.5% each year, you’d probably like a ‘catch-up’ opportunity. You’d like to be able to make up any losses by making additional contributions – and receiving additional tax deductions of course.
Certainty about retirement income
Finally, when you retire, you’d want your pension plan to pay you a set monthly income. Because it would be nice to have some predictability to how much you’ll have to live on during your retirement. And perhaps not be so dependent on the sale of your business or other assets to fund your golden years.
Reducing the taxable gain when you sell the business
But if you did sell your business, wouldn’t it be nice if you could somehow use your pension to reduce the taxable gain on the sale?
Sound pretty good?
That, in essence, is how an Individual Pension Plan (IPP) works.
By way of example, let’s look at the impact of an IPP for a hypothetical client who is 55 years old, incorporated his company in 1991 and has been earning six figure T4 income since that time.
The client would be able open an IPP by having his company contribute $256,998 which is fully tax deductible to an IPP (contribution amount is based on an actuarial calculation and can be made at once or over time). He would roll an additional $367,950 from his existing RRSP into the IPP in order to meet the requirements of Canada Revenue Agency.
The following year, the company would be able to contribute an additional $33,591, again fully tax deductible, to the IPP as compared to the RRSP maximum of $22,000 plus inflation. This amount continues to grow over time.
Assuming both plans are able to achieve a rate of return of 7.5%, by the time the client turns 65, he will have accumulated $1,942,000 in an IPP versus $1,147,250 in an RRSP – 69% more capital!
Pretty attractive numbers to be sure. Still, IPPs aren’t for everyone. They’re best suited for high-income earning business owners over the age of 40, whose businesses have been incorporated for more than five years, generate free cash flow for contributions and would benefit from additional tax deductions. If you meet those qualifications, then they are at least worth a close look and may be a ‘no brainer’ for some.
Next week, my colleague, Peter Churchill Smith will look at some of the factors driving the rapid growth in IPPs.
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At Newport Partners, our perspective is always the same – how does an issue affect the personal and business affairs of our entrepreneur clients and their families?
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One of the most common questions we hear from people is, “how much do I need to retire comfortably?” And from those who are already retired, “do I have enough to support my spending for the rest of my life?”
Together with 120 other entrepreneurs from 
We had our quarterly visit from Maureen Farrow last week. (Maureen is a highly-respected Canadian economist whom we retain to provide us with economic analysis and briefings.)
