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The Solution for the RRSP Constrained – IPPs Thumbnail

The Solution for the RRSP Constrained – IPPs

For high income earners, RRSPs can feel a bit like, well, squeezing into your favourite jeans from twenty years ago. They may still fit, but they’re definitely not comfortable anymore.

Just like those pants, RRSPs were tailored for a different era – over 60 years ago. While they were originally designed to grow with the population, they weren’t designed with quite enough stretch.

Unfortunately, no Prime Minister has seen fit to let out the waistline on the RRSP, leaving many high income earners feeling uncomfortable with their confines. 

The good news is you  may not need to rely on RRSPs to fund your retirement if they don’t fit your income or goals.

One of the solutions we often recommend for those who outgrew RRSPs are Individual Pension Plans (IPP).

Why you’ve outgrown RRSPs

Originally created in 1957, RRSPs were designed around the idea that an annual, tax-deductible contribution of 10% of yearly income, up to $2,500, would be enough to comfortably retire on.

But, decades of inflation has changed that drastically.

Back in 1957 when RRSPs were created, you’d have to make about $25,000 to maximise your RRSP contributions. While that doesn’t seem like much today, it’s roughly equal to $238,851 in today’s money. 

In 2020, the cap on RRSP contributions sat at $27,830, or 18% of annual income. That means you’d have to make roughly $154,611 to maximise your RRSP.

That’s very nearly a $100,000 difference. With inflation, it will only get worse, leaving high income earners feeling pinched.

What is an IPP?

In short, an IPP is a defined benefit pension plan for one member that leaves more room for those with a growing annual income.

So, what does that mean?

A Defined Benefit Plan is designed to offer members a pre-defined pension income after they retire. That means it’s not dependent on the investment returns of the plan fund. A defined benefit plan is designed to provide an annual pension equal to a percentage of a member’s highest earnings over a given period, which means it grows with you.

Because IPPs are guaranteed income for post-retirees, they are a very stable choice to even out other investments which may fluctuate with the markets. 

Who are IPPs for?

Though IPPs are a powerful tool for retirement planning, they don’t necessarily work for anyone pulling in over $150,000. Depending on your age, position in a company and income, IPPs could be a perfect tool to meet your retirement goal.

To get the best results out of an IPP, a member should:

  • Be at least 50 years of age

  • Earn over $120,000/year

  • Be an owner or executive of a incorporated company who does not participate in an employer pension plan

If that sounds like you, the IPP may just be a great fit for your current needs.

The benefits of an IPP

Just like growing up, IPPs come with both their benefits and drawbacks. For some, those benefits can help supercharge their retirement savings, for others the drawbacks are just too much.

To help you make the decision that’s right for you, we’ll give you a quick overview of both.

The pros of IPPs

  • All money put into an IPP can be invested

  • Those contributions are tax deductible, which allows your corporation to save 

  • The revenue from the plan can be split with your spouse or significant other in retirement 

  • Limits are higher than in RRSPs and can float, allowing you to top up contributions if your investments do not achieve a 7.5 per cent annual growth rate

  • Investments within the IPP are completely secured from creditors.

The cons of IPPs

  • Once invested, money is locked in the IPP (with limited exceptions) until the plan member turns 65. 

  • RRSP investments may need to be transferred in to fund past service requirements

Finally, a benefits plan that fits

The IPP is a great retirement funding vehicle for the right person, giving more room to contributions for those who need more room than an RRSP allows. If that’s you, take time today to give us a call to see if an IPP is right for you.