Here is the problem. Many entrepreneurs have held off planning for retirement while they built their businesses. Therefore, they did not contribute to their RRSP�s while they were younger. And because their incomes were low during their business building years, they did not have adequate RRSP room to build an appropriate retirement fund. Now they find themselves in their late 40�s and 50�s with successful business, but limited retirement contribution room. Their feeling is that they will never �catch-up.�
Here is another problem. As a business owner / professional, your maximum RRSP contribution limit is maximized at 18% or $15500 (whichever comes first). These limits were set with antiquated legislation set up in 1957 that did not even taken inflation into account. As a result, RRSP limits for high income earners tend to be inadequate. This means that individuals with income in excess of say, $86,000, are in a loss situation compared to others for retirement planning.
What if there was a program that could deal with these problems? In other words, how would you like to:
*Contribute to your retirement plan with your corporate dollars and
create a tax-deductible expense for your company at the same time.
* Make up for lost time through an initial lump sum contribution.
* Increase your retirement assets beyond the standard RRSP values.
* Increase your retirement income beyond the standard RRSP values.
* Have the benefit completely creditor protected.
How is this possible? Through an Individual Pension Plan (IPP). And the ideal candidate is 45 years in age, a business owner, with an income in excess of $100,000.
Here is how an IPP works: It basically a defined benefit pension plan that uses a formula that allows you to create a pension equivalent to $86,000 per year at the age of 65. If you were 50 years old, it would require a considerable lump sum to create such a pension. Therefore, you are allowed to contribute a considerable initial lump sum, allowing you to make up for �lost time� In many cases, this can be several hundred thousands of dollars. And the amount is fully deductible to your corporation.
As well, the annual contribution amounts are also greater than the standard RRSP limits. Typically, this amount is considerably higher than the $15,500 allowed in an RRSP contribution.
An example would be a 55 year who has owned an incorporated business and has a T-4 income inexcess of $100,000. By creating an IPP, this individual can immediately contribute $115,000 into the IPP. This amount is fully deductible to his corporation and accumulate tax deferred just like an RRSP. The next year, this individual can contribute an additional $25,000 into the IPP, again exceeding the $15,500 RRSP limit. At retirement, the basket of assets is worth in excess of $400,000 above and beyond what the RRSP program would have created.
As for investment options, there are multiple products to choose from. Obviously, the better the investments perform, the more funds you will have at retirement
The end result is that you end with a significantly greater retirement nest egg at retirement resulting in greater wealth
As well, there is also terminal funding. If you sell your company, you can roll a considerable amount of money into your pension fund tax-free.
Sounds to good to be true? Perhaps - but it\\\\\'s not without a fee. There is a fee that runs around $1200 per year But that\\\\\\\\'s a small cost when you consider the long-term outcome.
An IPP is a great idea for the right person. However, you should discuss it with your financial advisor to make sure it is an appropriate fit for your needs.
This article was prepared by John Klotz. John is Vice President - Financial Services at LMS Prolink Ltd. You can reach him at (416)-644-7700 or email at johnk@lms.ca