Individual Pension Plans can still provide significant contribution opportunities
Individual Pension Plans (IPPs) have long been viewed by advisors as more advantageous than Registered Retirement Savings Plans (RRSPs). Despite recent changes to IPP funding rules, the current advantages of an IPP relative to an RRSP are expected to continue, ensuring that an IPP remains a viable, tax-efficient retirement planning vehicle for certain business owners, incorporated professionals, and highly-paid employees.
When setting up an IPP, a qualifying transfer (or provisional Past Service Pension Adjustment) is required in order to recognize and fund for previous years of employment. The Income Tax Act was amended with respect to setting up IPPs for connected persons, such that the amount of the required qualifying transfer is now related to the member’s age, RRSP account balance and any unused RRSP contribution room that existed at implementation. This change may result in an increase in the required transfer and, thus, a reduction in the maximum contribution opportunity.
Another change made to IPPs in 2012 is that an annual minimum amount must be withdrawn for members over age 71. The calculation of this minimum amount is now similar to the minimum withdrawal calculation for Registered Retirement Income Funds (RRIFs), which is based on the market value of assets and the member’s age each January 1st. This change will mainly affect IPPs that have developed large surpluses with members over age 71 as it will increase the amount required to be withdrawn annually.
The bottom line is that IPPs may still provide significant contribution opportunities to a tax-efficient environment and can help Canadians target sufficient retirement income for their desired lifestyle.