Posted under: Business Owners, RCA
The recent flexibility of acceptable retirement ages has given Canadians more to consider when planning their future. How can you be sure you will have sufficient asset to be able to choose early retirement? Just as any successful business relies on a business plan for it’s success, individuals need a retirement plan. With the help of a financial advisor, this can be a worthwhile exercise yielding excellent results in future income planning as well as peace of mind today.
Most Canadians do not feel government benefits alone will be sufficient for retirement. However, it is also true that most Canadians have not taken a structured approach to retirement planning. The Individual Pension Plan (IPP) has been implemented by many business owners and professionals as a means to contribute up to 65% more than RRSPs allow into their retirement assets.
Incorporated professionals and business owners are eligible to set up an Individual Pension Plan and/or a Retirement Compensation Arrangement and take advantage of higher contribution amounts than are currently available through RRSPs. In some cases, these limits can range from hundreds to tens of thousands of dollars above current RRSP limits.
If you own your own business and are relying on the sale of the business to fund your retirement then creditor proofing those assets now would provide a peace of mind. Retained earnings within a business are vulnerable to the slings and arrows of the business cycle and RRSPs are not completely creditor proofed. Both the Individual Pension Plan and (non-leveraged) Retirement Compensation Arrangement are 100% creditor proofed and allow for contributions to be made from the company directly into your retirement plan of choice.
If you make more than you consume in a calendar year then you may wish to defer tax on a portion of your income until you retire when your marginal tax rate may be lower. The IPP allows you to make tax deductible contributions from your pre-tax corporate dollars to your Individual Pension Plan. These contributions will not be taxed until you retire and withdraw an annual pension. The Retirement Compensation Arrangement (RCA) also allows you to make contributions from your corporation to your RCA until your retirement from the company.
It is difficult for many Canadian’s to translate their contributory plans into the annual income needed to support them over their lifetime. The Individual Pension Plan is unique from the RRSP in that it provides an individual with various annual income figures depending on that individual’s retirement age. This annual income is based on assumptions specific to the individual. Other factors used to ensure a Pension Benefit include annual contributions made to the Plan as well as market performance. Every three years the Actuary will review the plan making sure it is on track.
Unlike the RRSP there are conservative investment guidelines for Pension Plans. They must be diversified, to provide a safety first approach to investing. Also, they must earn an interest rate of 7.5%. Most Canadians have seen their RRSP assets depreciate over the past five years with no recourse or additional contribution room to make up for these losses. If for any reason your IPP portfolio underperforms, you have the opportunity to make up the losses with additional tax deductible contributions, an option not found in the RRSP.