For the typical Canadian wage-earner, RRSPs are arguably one of the most effective ways to save for retirement. But for higher-wage earners, the annual contribution limits can be problematic. For 2006, for example, the maximum allowable RRSP contribution is $18,000, reached at an annual earnings level of $100,000. In other words, once you start earning $100,000 or more, your maximum RRSP contribution is less than 18% of your earned income.
For incorporated business owners and executives who need to contribute more in order to fund their desired retirement lifestyle, the Individual Pension Plan (IPP) provides a possible solution.
Supersized retirement plans
An IPP is a registered defined benefit pension plan that a company sets up for the benefit of one employee (or for the employee and his or her spouse). Contributions can be made by the employee and employer, are tax-deductible, and grow tax-deferred within the plan, just like an RRSP. The big difference, however, is in the amount that can be contributed.
With an RRSP, allowable contributions are based on the previous year’s earned income. But an IPP is a defined benefit plan. That means that it promises to pay out a specified amount when the plan member retires. The allowable contribution is whatever is needed to fund that defined benefit.
A plan member’s future pension income will be based on a number of factors, including years of service and salary. Actuarial calculations will determine the amount that needs to be contributed each year in order to meet the promised pension benefit.
Higher limits
In most cases, the required contribution will be significantly higher than RRSP contribution limits. Lump-sum contributions for past service may also be possible. And if the investments in the IPP don’t perform well enough to fund the defined benefit pension, tax-deductible “top ups” can make up the difference.
The plan sponsor can deduct contributions made on behalf of the employee. IPP set-up fees and ongoing administration costs are also tax-deductible. The table below shows maximum RRSP versus IPP contributions for employees of various ages (40 through 65) reporting annual income of more than $105,000.
| Age in 2006 |
Maximum 2006 RRSP contribution |
Maximum 2006 current service IPP contribution |
|
Maximum past-service employer contribution* |
|
Maximum first-year tax-deductible IPP contribution |
| 40 |
18000 |
19882 |
+ |
46709 |
= |
66591 |
| 45 |
18000 |
21838 |
+ |
76062 |
= |
97900 |
| 50 |
18000 |
23987 |
+ |
108304 |
= |
132291 |
| 55 |
18000 |
26352 |
+ |
143797 |
= |
170149 |
| 60 |
18000 |
28945 |
+ |
182704 |
= |
211649 |
| 65 |
18000 |
39386 |
+ |
339371 |
= |
378757 |
* Assumes past service to 1991 and $105,556 annual income. RRSP transfer of $242,600 not included.
IPPs are not appropriate for every investor, however. They are most useful for employees over 40, earning at least $105,000 a year, and with a long past-service record with the sponsoring company.
If you or someone you know might be a candidate, IPPs are well worth exploring. RBC has the necessary expertise to administer these sophisticated, often complex plans. Contact your local Group Financial Services representative to find out how your company may benefit by setting up an IPP program.
Talk to your Group Financial Services representative to arrange for an education seminar in your office.
