Article DownloadBob Smith is a 55 year-old self-employed businessman. He has been married for 25 years and has two children in high school. He hopes one day his children will take over the business, but for now he plans to work until his 71st birthday. Bob has begun to plan for his retirement and is looking for a way to defer the tax on earnings until he is able to withdraw that money as income upon retirement.
Comparing the Individual Pension Plan (IPP) to the RRSP strategy, Bob discovers that at retirement the IPP provides him with an increase of up to 65% more assets than his RRSP. A substantial difference encourages Bob to look at the numbers.
As Bob has been in business for 20 years, he qualifies for full Past Service benefits from January 1, 1991. This increases his first year contributions by $194,800. Coupled with his Current Service contribution of $30,700, he can contribute $225,500 tax deductible, from his company to his Individual Pension Plan in the first year.
Bob learns that in order to capture Past Service he will have to rollover (with no tax consequence) $398,120 of his existing RRSP money to the IPP. His Financial Advisor assures him he has the amount needed for the RRSP Qualifying Transfer and that arrangements can be made to move these assets to an IPP.
As Bob can take advantage of full Past Service, he proceeds to investigate the projected accumulation of his IPP assets. Knowing that the assets must earn a return of 7.5% compounded annually, and that shortfalls and surpluses are remedied at a triennial valuation, Bob lists all contributions, plus interest growth, to his 71st birthday:
| Past Service Contribution + Rollover | $592,920 |
| Total Current Service Contributions to age 71 | $944,000 |
| Amounts Above + 7.5% per annum compound growth | $3,698,088 |
| Additional Funding allowed at retirement | $314,552 |
| Total Plan Assets at age 71 | $4,012,640* |
The total accumulation for an RRSP Only Strategy at age 71 would be $2,419,362.
Bob's advisor also informs him he can add his spouse to the Plan who has worked and collected a T4 income from for the past 5 years and will most likely continue until retirement. His advisor adds that his children can also be added to the IPP if they join the company at a later date. This succession planning feature further convinces Bob that the IPP is the right solution for him.
*Assumptions IPP contributions are based on maximum earnings of Date of Birth= July 1, 1956, $127,611 for 2011 Existing RRSP= $398,120 Future RRSP Contributions for 2011= $22,450 Interest on IPP/RRSP Investments= 7.5%
