Individual Pension Plans: A Special Opportunity for Self-Incorporated Agents


When you made the decision to become self-employed, you knew there would be trade-offs. The one that likely mattered to you the most was that you were no longer trading your time for money but instead getting paid based on the results of your achievements! There was however, one key benefit available in your former life that you may have given up; the opportunity to belong to a company pension plan.

While being a member of a pension plan is not a guarantee of a comfortable retirement; knowing it will be there one day can certainly provide peace of mind, with respect to saving for the future. Ironically, due to your success, your higher tax bills have now made you a major contributor to someone else’s pension plan; the Government of Canada’s!  

Your challenge today lies in growing and preserving the wealth that you have worked so hard to create.  Reducing the taxes you are paying along the way will help achieve this goal.  As an Incorporated real estate agent you have a unique opportunity available to you that is worth exploring called an Individual Pension Plan or IPP.
 
What is it? An IPP is a personal pension plan designed specifically for you and your corporation (and your spouse, if desired, if they are an employee of your company). An IPP is a “Defined Benefit” pension plan -meaning you know exactly what you will get at retirement, as early as age 55 or as late as age 71, in terms of a monthly paycheque to yourself.  
 
Who is it for? Ideally you are 40 years of age or older (this is one time where being older works in your favour!) and receive T4 income from your corporation of at least $100K annually.  An IPP is ideal if you require more tax sheltering room than is available under an RRSP and have owned your corporation for a number of years, as this will count towards “past service.”
 
What’s so great about it? There are significant contributions permitted for “past service” you have provided to your own, or, if applicable, a related company before you set the IPP up. Contributions in subsequent years can be significantly higher than those permitted under RRSP rules.  Most importantly, contributions are not considered taxable benefits to you, the “employee.”  
 
Show me the money!  Here’s a quick snapshot of how an individual with T4 earnings of $151,278 and prior “service” from 1991 could benefit in the first year their IPP is set up.
 
Assuming you are 50 years old, in your first year of your IPP you could contribute up to $288,209  versus the standard $26,500 RRSP contribution. That is a $261,709 advantage!
 
Age in 2019 2019 IPP Contribution 2019 RRSP Contribution 2019 IPP Advantage
40 $123,571 $26,500 $97,701
45 $202,084 $26,500 $175,584
50 $288,209 $26,500 $261,709
55 $382,985 $26,500 $356,485
60 $487,066 $26,500 $460,566
62 $531,475 $26,500 $504,975

Depending on your age the subsequent year’s allowable contributions will always exceed levels permitted in an RRSP

Other benefits of creating an IPP

  • No more worrying about RRSP deadlines; your corporation has 120 days after its fiscal year end to make an IPP contribution.
  • Assets within the IPP are creditor proof, a very important consideration when securing your future
  • Any money you borrow to fund the IPP, set up costs and ongoing administration expenses are all tax deductible for your corporation.
  • If you decide to retire earlier than you originally planned, then any investment shortfall can be funded by a lump sum, tax-deductible contribution. 

Sounds too good to be true – what is the catch?

  • Funds are considered “locked-in” (just like all pension plans) and there is little extra contribution flexibility once your plan has been created.
  • After creating an IPP, your RRSP room is virtually eliminated in subsequent years; in most cases your future RRSP contribution is limited to $600 per year moving forward.
  • Shortfalls in pension plan asset values normally require further contributions to get the plan back on track.

Is it right for me?  An IPP is an excellent vehicle to build your retirement plan and net worth. Nonetheless an IPP is a complex product and requires various calculations to see exactly how it may benefit you.  Everyone’s position is unique, the benefits and associated costs will depend on your personal situation.  As with all taxation related products there are important factors that need to be understood.

In addition to an IPP there are many creative ways to build and protect your wealth and other strategies may prove more beneficial, so it is important to consult with your professional team (financial planner, tax accountant, corporate lawyer) before making any final decisions.

 

ABOUT THE AUTHOR

Katrina Lyons, CFP, CLU

Written by Katrina Lyons, with excerpts and calculations from printed material published by Lesniewski Moore Consulting Group Inc. Actuarial & Retirement Plan Consulting.

Katrina Lyons began her career in 1986 and specializes in creative insurance and investment strategies and solutions for self-employed individuals. She believes in taking the time to understand what is important to her clients personally, as well as financially, and designs financial plans to guide them in achieving their lifestyle and estate planning goals through the sale of various financial products. 

She will work on a fee-for-service, or commission basis, as agreed upon by the client and their needs after an initial consultation.  Katrina is a registered mutual fund representative with Excel Private Wealth in the province of Ontario and independent life and health insurance agent in the province of Ontario licensed through FSCO. Visionary Wealth Planning is her trade name. Mutual Funds are offered through Excel Private Wealth and insurance & segregated funds products through, but not limited to: Equitable Life, Sun Life, Canada Life, RBC, Manulife and TuGo travel.

The information in this article is meant to provide information and to generate discussion on various financial planning topics.  It is not intended, nor should it be regarded as financial advice.  An assessment of your personal situation is always a prerequisite. Always consult an accountant or lawyer for detailed tax or legal advice. Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Mutual funds are not guaranteed and the not covered by the Canadian Deposit Insurance Corporation or by any other government deposit insurer.  There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount of that the full amount of your investment in the fund will be returned to you.  Fund values change frequently and past performance may not be repeated

If you’d like to explore whether an IPP may be beneficial for you or to discuss other innovative strategies for building, increasing and protecting your wealth then please feel free to reach out to me at any time!    

T: 647-299-4085
E: katrina@visionarywealthplanning.ca

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