During the 1990s, RRSP (or RSP) season was seen primarily as a time where clients would sit down with their Advisor, review their RRSP portfolio, and provide a cheque for their annual contribution. For many, the focus was to make sure that the contribution cheque was received by their financial institution before the last day of February in order to receive deductions for the previous year.
Now, with monthly deposits and the ability to make contributions with a simple click on our smartphones, the mad February RRSP rush has all but vanished. What this has allowed advisors and their clients to do is spend more time focusing on financial planning strategies that augment their goals such as tax-free savings accounts (TFSAs), life insurance strategies, and registered education savings plans (RESPs).
With the creation of Professional Corporations and the explosion of the small business economy, the doors to even more complex and beneficial planning options have been opened. Utilization of passive corporate savings strategies and corporate owned insurance has added additional opportunities to further increase retirement savings. However, there are new passive income rules that are punitive to accumulating too much assets within a corporation. With all of this in mind, one strategy that especially merits a review for business owners is having ones retirement funded through their corporation via an Individual Pension Plan (IPP).
An IPP provides the business owner or incorporated professional the opportunity to establish their own defined benefit pension plan where they have the advantage of contribution limits much higher than those of RRSPs. An Individual Pension Plan is very tax efficient as it uses pre-tax corporate dollars to fund retirement, while providing creditor protection of the assets, and deductibility of investment and administration expenses to their corporation, which is not allowed with RRSPs. The IPP can also be used to reduce retained earnings within the corporation to aid in reducing any tax liability from having passive asset income in excess of $50,000 (see our recent article All Eyes on the IPP for more information about taxation on passive income) by instead, directing those assets to the IPP.
Over the life of the IPP you can accumulate up to 64% more assets than that of the RRSP due to significantly larger funding limits, a past service catch-up, terminal funding, and the ability to top up the plan if assets do not grow at assumed assumptions including a 7.5% rate of return. Coupled with the fees being deductible, this represents a huge advantage over the RRSP.
RRSP Season is a great time to discuss alternative savings strategies like the IPP, that could offer significant value over and above that of an RRSP. If you are over the age of 40, are incorporated, have excess corporate income, and wish to increase your retirement savings in a tax efficient manner, then an IPP, which is considered a supercharged RRSP for incorporated professionals, should be explored as an alternative to your RRSP strategy.
By Fraser Lang CLU, CFP, CHS, Senior Vice President, GBL Inc.
Founded in 1995, GBL is a leading provider of retirement and health solutions for business owners across Canada. For more information on our services and strategies contact: firstname.lastname@example.org or 403.249.1820 and follow us to learn how we can help Build Your Future.