A few weeks ago, we looked at the topic of raising RRSP limits. As noted then, it was based on a C.D. Howe Institute report that suggested one possible solution to the alleged retirement crisis was simply to go back to the half-century-plus RRSP and raise contribution limits for the (relatively) few affluent people who are forced to save in taxable accounts because they’ve maxed out on RRSP room.
If you’re at top executive or own your own business and are 40 years of age or older, there may be another way to get the benefits of RRSPs. The Individual Pension Plan or IPP is an employer-provided program that replaces RRSP savings by an employee, says Stephen Cheng, managing director of Vancouver-based Westcoast Actuaries Inc. To be eligible for an IPP, you need to receive pension-eligible T-4 employment income. Self-employment income, partnership income and dividend income are not pension-eligible, Cheng says. So if you own your own business, you’d have to pay yourself a regular salary that generates T-4 employment income.
One advantage is that all eligible employer contributions are tax-deductible for corporation tax purposes, but won’t be taxable to the employee until the plan starts to generate pension income. Also, if the IPP is in deficit after the three-year actuarial valuation, the employer can top it up with further contributions. In addition, IPP assets are creditor-proof: always a plus for the self-employed; and as with traditional Registered Pension Plans, pension income can be split up to 50% with one’s spouse, for income tax purposes (pension splitting).
The older you are, the more the relative room can be held in an IPP relative to an RRSP. For those in the top tax bracket, the maximum RRSP contribution is currently $24,270, an amount that does not vary by age. However, IPP room gets larger the closer you are to retirement. Maximum IPP contribution room at age 40 is $26,097, rising to $31,488 by age 50, $38,005 at 60 and a whopping $41,282 at age 65. In the latter case, the IPP has a contribution room advantage over the RRSP of a massive $17,012 a year!
Employers can make past service contributions to a new IPP in 2014, Cheng says, providing the employee received pension-eligible T-4 type employment income over the years being calculated. The employee must transfer an amount from his or her personal RRSP into the IPP (since 1997 the maximum transfer amount required for each service year has been $24,330, with lesser amounts between 1991 and 1996). For all years between 1991 and 2013, the combined maximum that can be transferred into an IPP from an RRSP comes to $510,470: just over half a million dollars! If the IPP is set up in 2014, the RRSP deduction limit will be reduced to $600 each year, starting in 2015.
The calculations are not simple but you can find a free customized IPP quote online here.