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?…
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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