For the average income in Canada, the maximum RRSP contribution amount of $21,000 (for 2009) is more than what most employed workers are allowed to contribute. To put this in perspective, in order to qualify for the $21,000 contribution limit, an employee would need an income of around $117,000, well above the average Canadian salary.
However, what about those who make higher salaries? Take physician salaries for instance, a hospital specialist can make $300,000 a year with very little in the form of overhead fees. If that specialist maxes out his RRSP of $21,000, it will only represent 7% of his income. So does making a high income result in fewer tax deferral retirement account opportunities?
There is another option for the wealthy, it’s called the individual pension plan (IPP).
What is the Individual Pension Plan (IPP?)
An IPP is an alternative to the RRSP for executives/business owners with higher incomes. It is a defined benefit plan that both employee and employer contribute to but with higher contribution limits (compared to an RRSP).
How much can you contribute to an IPP?
According to an article by Jonathan Chevreau:
IPP’s upper limits are established by an actuarial valuation conducted once every three years. The older the IPP member, the higher the contribution amount, assuming comparable income levels.
Who should consider using the IPP?
According to KPMG,
- a key executive and/or owner-manager of a corporation
- over 40 years old; and
- earning a base salary of more than $100,000
What are the Benefits of the IPP?
- An IPP allows the (older) plan holder to contribute more than an RRSP would allow.
- IPPs are creditor proof while RRSP’s are not.
- The IPP account holder can guarantee their retirement income as it is a defined benefit plan. Compared to an RRSP where retirement income largely depends on market performance.
What are the drawbacks of the IPP?
- Access to the IPP funds are locked until retirement.
- Setup costs are higher than an RRSP.
This is a very brief primer on the individual pension plan as the details get quite a bit more extenisve. As mentioned above, the individual pension plan is meant for those with higher incomes, at least 40 years old and ownership interest in the corporation that they work for (ie. plan to retire with the company). If there are any readers currently on an IPP, it would be great to hear your experiences.