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What is an IPP?

An individual pension plan (IPP) is an alternative to an RRSP that allows business owners and professionals to defer taxation in far greater amounts than with an RRSP. IPPs provide much larger tax deductions than RRSPs. Accordingly, business owners can build significantly larger retirement assets with an IPP.

An RRSP allows a taxpayer to save 18% of the previous year's earned income, up to a maximum dollar limit (currently $21,000 in 2009), regardless of their age. By contrast, the IPP contribution is age-related. It grows each and every year. For example, for a 40- year old earning $122,222 the 2009 IPP contribution limit is $23,022. For a 50-year old, the 2009 contribution limit is $27,778, and for a 65-year old it is $36,816.

You also get a credit for pension purposes in respect of years of past service with the company. This creates a cost that requires supplementary tax-deductible contributions that can be funded in one installment or over a period of up to 15 years from your corporation. For example, a 50-year old who has earned $100,000 or more since 1991 would be able to contribute approximately $160,000 to fund the past service payable for their pension. At the time of retirement, if there is cash available in the company, the Income Tax Act allows for "terminal funding" to improve the pension and this creates a tax deduction that can be in excess of $350,000.

One of the top benefits of and IPP is that these higher contributions allow one to defer taxation corporate income and tax free investment growth. This can amount to hundreds of thousands of dollars over the long-term. The IPP is the answer to many important retirement planning issues, such as lower RRSP contribution limits, inflation adjustment in retirement, tax free growth, survivor income and advanced estate planning.

To ensure an IPP is right for you compare RRSP and IPPs here.