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What
is an Individual Pension Plan and whom are they designed for?
This
month's question is answered by Michael Wagman, who is a Partner at
Lipton, Wiseman, Altbaum & Partners LLP Chartered Accountants, a
mid-sized Toronto CA firm (www.liptonca.com). He also consults with
Scotiabank on the development of products for small businesses.
Individual
Pension Plans, or IPPs, have become increasingly popular retirement
savings tools in recent years. They are best suited for business owners,
senior executives, and incorporated professionals, usually over
40-years-old, who are making more than $100,000 per year. For these
individuals, IPPs can generate significant tax savings above and beyond
those provided by a registered Retirement Savings Plan (RSP).
An
IPP is a defined-benefit registered pension plan established for the
benefit of a single employee. The annual retirement benefits are defined
by the terms of the plan and are based on a percentage of the employee's
annual employment income.
An
IPP can be funded by employer and employee contributions or fully funded
by the employer. However, to qualify as an IPP the employer must fund a
minimum of 50% of the required contributions. IPP contributions and
expenses are fully tax-deductible to the business.
The
most significant advantage of an IPP is the allowable contribution
limit, which is generally higher than the RSP contribution limits.
Contributions to the plan increase with age.
In
addition, pension benefits are protected from creditors of both the
employer and the employee; the employee gets to participate in the
investment decisions of the plan; and pension contributions are allowed
in respect of past employment service.
However,
there are also disadvantages. Unlike an RSP, the funds in an IPP are
locked in until retirement. And unlike an RSP, an IPP does not allow for
income splitting - you cannot make spousal contributions to an IPP.
In
addition, set-up costs and annual operating expenses are significantly
higher than those associated with an RSP - an actuarial valuation is
required at set up and every three years thereafter.
You
can contact Michael Wagman at michael@lwap.com.
[Source:
Scotiabank]
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