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Types of Retirement Plans for Business Owners
Specific retirement planning options are available to businesses owners above and beyond traditional options. Discuss these options with your advisor to see which ones would work best for you. They include:
You can establish an IPP to increase your pension savings. An IPP is a defined benefit pension plan designed and structured for one individual member. As a defined benefit pension plan, the benefit payable at retirement is specified and IPP contributions are made accordingly. Although you can contribute, typically your company makes your contributions.
Consider this if you:
- are at least 40 years of age
- have a corporation
- earn an annual base salary of $100,000 or more
- the maximum IPP contribution limit is greater than the RRSP contribution limit
- contributions are tax deductible to the company
- as a registered pension plan, it offers a level of protection from creditors
- You may not have as much flexibility to split income on retirement.
- Your pension benefits are locked-in under applicable pension benefits legislation until retirement, at which time they must be used to provide retirement benefits (usually in the form of a life annuity or life income fund).
- The pension adjustment arising from your IPP in the prior year will be deducted from your available RRSP contribution room each year. Thus, you may not be able to contribute to your RRSP.
- Since an IPP is a registered defined benefit pension plan, annual federal and provincial reporting is required as well as an actuarial valuation every three years.
- There are start-up and ongoing costs of administering an IPP.
- The company is required to make the contribution even in less
An IRP offers tax-free supplemental income through tax-exempt life insurance.
Consider this if you:
- are at least 10 to 15 years from retirement
- are already maximizing your annual RRSP contributions
- have available disposable income
- require life insurance
Similar to an IPP, a company can use RCAs to invest for the retirement of key employees. An RCA is an arrangement where contributions are made by the company to another party (called the Custodian) in respect of benefits that are to be paid to the employee after the employee’s retirement or termination. When the company makes a contribution to the RCA, 50% of the contribution is deposited with the custodian of the RCA Trust to be invested in an investment account and the other 50% is deposited with the Canada Revenue Agency (“CRA”) as a refundable tax in a non-interest bearing account. Furthermore, 50% of all interest income, dividends and realized capital gains earned in the investment account must be remitted to the refundable tax account. As the employee receives benefits, the CRA refunds $1 from the refundable tax account for every $2 paid out of the RCA Trust. RCA payments can be a lump-sum payment or as supplementary retirement benefits.
- it avoids the valuation requirements of an IPP
- a contribution to an RCA provides an immediate deduction to the company
- the contribution is not taxable to the employee until benefits are received; usually taxes paid by the employee are lower since their taxable income declines upon retirement
- high refundable tax rate of 50%
- loss of preferential tax treatment for capital gains and Canadian dividends
Category: Small business