There are about 1.2 million small businesses in Canada. In recent decades these owner-run companies represent a larger percentage of the Canadian economy.
There are many advantages to running your own business, however the majority of entrepreneurs don’t belong to a pension plan. I speak with a lot of business owners who are looking for the best way to set up a retirement savings program.
An Individual Pension Plan (IPP) remains a smart option for business owners who are looking to minimize their tax exposure, while setting aside some of their earnings for their golden years. Similar to a Retirement Savings Plan (RSP), IPPs let you save on a pre-tax basis. The main difference between the two lies in the way the money goes into the specific plan.
An RSP is a defined contribution plan: the amount of money going into the plan is fixed at maximum 18 per cent of annual employment income. The amount of money available to the RSP holder in retirement depends on these contributions and their growth over the working life of the RSP holder.
An IPP is a defined benefit plan where the company is responsible for making contributions over the life of the plan to produce an inflation-protected pension for the plan holder. Payments are made from the pension to the plan holder throughout their retirement years.
A key advantage is that as business owners get older, the IPP maximum allowances are larger than those of a traditional RSP. This is often when a small business is more successful and there is room to make more significant contributions to support a more comfortable retirement
At the end of the day, the beauty of an IPP compared with an RSP is that you can put more pre-tax money into it over your career.
Like any tax strategy, the devil is always in the details. There are a number of considerations to determine the best setup and ongoing use of an IPP. Business owners should consult with a financial advisor to understand the full picture.
Will Mactaggart | firstname.lastname@example.org | 519-827-2906
All material has been prepared by Will Mactaggart. Will is a Director, Wealth Management and Portfolio Manager at Richardson GMP Limited.
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