By Justin Ezekiel and the Sun Life team
If you have reached your RRSP contribution limit and meet specific criteria, an individual pension plan could offer you another way to save for your retirement while lowering your taxes.
Are you a business owner or manager? Looking for an alternative to your RRSP to save for retirement? Would you also like to keep tax? If so, an Individual Retirement Plan (IPP) might be right for you.
How can an individual pension plan save you taxes?
An IPP can save you even more tax if you own your business. This is because the contributions paid by your company, like all administrative costs, are deductible from taxable income.
For you and your business, an IPP can offer exciting tax planning opportunities at various times:
when you begin to fund your plan through one-time deductible contributions called “past service funding contributions”;
when you retire, with occasional deductible contributions called “retirement capitalization contributions”.
During the first year of your plan, your company may make a sizeable one-time deductible contribution. This corresponds to the net value of the “past services” that you have provided. This means that an IPP remains an attractive solution up to 71. Why? Because your T4 income history from the plan sponsor company affects the taxable value of your initial contributions. As you approach retirement, you may be able to make the maximum contribution to your IPP through the retirement capital contribution. The latter allows you to make more deductible contributions in the year of your retirement.
(*Depending on your situation.)
These options allow you to use customized tax planning solutions to enhance your retirement. Be aware, however, that planning involving an RRSP becomes limited once the IPP is established. In other words, impossible to have the butter and the money for the butter. Contributions to an IPP will give rise to pension adjustments which will reduce (and practically eliminate) the new RRSP contribution room. You will also have to proceed with a tax-free transfer of an amount from your RRSP account to pay part of the capitalization contribution for past services.
Is an individual pension plan right for you?
Opting for an IPP (and setting it up) is not something you do independently. Help from an advisor is essential. The latter may collaborate with an actuary to:
determine if an IPP is an appropriate strategy for you;
choose the best funds for your IPP.
Most advisors now offer virtual meetings. Find an advisor.
