Maximizing Tax-Deferred Retirement Savings

Mike Magreehan, BBA (Hon), CFP
January 02, 2008
Written by Mike Magreehan, BBA (Hon), CFP
The Individual Pension Plan retirement strategy
32When it comes to retirement planning, most Canadians aim to maximize their RRSP contributions. It is becoming increasingly evident that this approach may not be suitable for all people – especially the high-income earner.  While RRSPs are a convenient way to save for retirement, there are maximum contribution limits. For instance, a chiropractor earning more than $100,000 in 2007 is subject to the maximum RRSP limit of $19,000. Quite often, this limit is inadequate to meet desired retirement goals.  However, there are several options whereby you can still save; however, most solutions involve “taxable” accounts, and any investment income is taxed annually. The long-term effect of tax-on-investment is detrimental to overall returns.

What if there was a solution whereby you could still make annual tax-deductible contributions, the investments would still compound tax-deferred, but the annual limits would be much higher than the antiquated RRSP limits  – and you would have full flexibility and control over those assets?

Enter Individual Pension Plans (IPPs)
Introduced in 1991, an IPP is a pension plan that is set up for one person – you. Recent enhancements to the Income Tax Act have made IPPs even more attractive with higher contribution limits, which increase substantially as retirement approaches.

The IPP and the chiropractor
IPPs are designed for business owners, such as chiropractors, who are at least 40 years old, and have employment income over $100,000. Annual contribution limits are dramatically larger, and are made over time to ensure the plan is sufficiently funded to meet retirement goals.

For example, Dr. Tom is a 50-year-old chiropractor and earns $100,000 operating a successful practice in Ontario. If he establishes an IPP, he will make a $24,000 tax-deductible contribution in 2007 – versus the $19,000 RRSP limit - and at age 60, his IPP contribution limit will rise to $46,000 – versus approximately $25,000 RRSP limit for that age. At age 65, Tom could expect his IPP retirement income to be 60 per cent higher than his maximum-funded RRSP. The IPP becomes an excellent tool to transfer money from the company to the chiropractor, on both a tax-deductible and tax-deferred basis.

The IPP versus the RRSP
IPPs allow substantially larger tax-deductible contributions, and retirement savings build faster in a tax-deferred environment. All plan contributions and expenses, such as set-up and annual fees, are tax-deductible.  A large initial contribution is often allowed to fund past service, and may be transferred from an existing RRSP.

Whereas RRSP investment losses cannot be made up with new contributions, IPPs allow an individual whose investments have not performed to make additional tax-deductible contributions to bring the plan back on track. IPP assets are creditor-protected. This is critical for business owners because, in most provinces, RRSPs may be seized by creditors. 
Unlike RRSPs, IPP funds are “locked-in” until retirement, meaning your ability to access these funds prior to retirement is limited. And, under pension law, the company is required to make annual contributions, and this may be a concern if cash flow is tight.

However, overall, IPPs represent a unique way for chiropractors to maximize tax-deferred retirement savings.
A qualified team of financial professionals, including your accountant, should work with you to discover the wealth-building opportunities of an IPP. •

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