IPP Success Story

They called themselves the two Pez dispensers. They ran a very successful Pharmacy in Vancouver which they had incorporated in 1996. He had run the operation in the early years, establishing a solid foundation. She joined him in 2001 once their youngest had started University.

Prior to Rita starting in the business, Klaus had been drawing $150K per year in T4’d salary. When Rita joined she was drawing $63K per year rising to $85K this past year. Ten years ago they were introduced to the idea of investing for retirement through an Individual Pension Plan or IPP. Until that time they had been maximizing their RRSP’s as they were able. When they made the switch in 2009, Klaus was 60 and Rita was 56.

You can make up for previous years of service as soon as you set up the plan. Electing to purchase past service allows you to inject additional tax sheltered funds into your plan today. This provision greatly benefits those who wish to take early retirement or top up their pension plan. 

So why did they move from RRSP to IPP contributions?

What was it that convinced them to change course when they were so close to retirement?

Here are a few facts about an IPP that helped persuade them to significantly enhance their retirement plans: 

  • The annual contribution ceiling is higher than an RRSP. This is age dependent and increases automatically as you approach retirement age.
  • Contributions to your plan are made by your company, therefore, regular or special contributions AND the costs of setting up and monitoring the plan are fully tax deductible to the company.
  • Returns are Tax-sheltered just like in an RRSP or TFSA.
  • You can make up for previous years of service as soon as you set up the plan. Electing to purchase past service allows you to inject additional tax sheltered funds into your plan today. This provision greatly benefits those who wish to take early retirement or top up their pension plan.
  • When it is time for you to retire, your company can substantially upgrade your plan with additional tax-deductible contributions. If the investment returns are under 7.5%, the company may cover the shortfall.
  • This special contribution is deductible for the company and non-taxable to you.

After the two Pez dispensers completed the fact finder and had their unique situation methodically reviewed for suitability, it became obvious that this plan would significantly enhance their retirement income.

When their plan was initially set up in 2009 it was funded with $615K as follows:

  • RRSP Qualifying Transfer - He had $238K and she had $74K that qualified.
  • Corporate Contribution - To make up for past underfunded limits, they were able to contribute $303K from their corporation into the plan.
  • Corporate tax deductible contributions were made every year for the next ten years.

The proportional advantage

 

Age Current service for 2017 Funding as a % of covered wages Maximum RRSP contribution Maximum RRSP contribution as a % of earned income Increased IPP funding
$ terms % terms
40 $27,533 18.89% $26,010 18% $1,700 6.82%
45 $30,243 20.75% $26,010 18% $4,322 17.33%
50 $33,221 22.80% $26,010 18% $7,201 28.89%
55 $36,491 25.04% $26,010 18% $10,365 41.58%
60 $40,084 27.00% $26,010 18% $13,839 55.51%
64 $43,211 29.65% $26,010 18% $15,904 63.80%

Now they are retiring and wish to take advantage of the promised top-up.

The market value of their plan as of December 2019 was $1.9 MM

Now they are retiring and wish to take advantage of the promised top-up.

They are allowed to contribute more than their goal, however, they only wish to take a further $1 MM in tax deductible contributions from the corporation. This will be done over the next year or two.

This is a very happy story and, if you find yourself today in a similar situation to their’s 10 years ago, this could be your story as well.

Your retirement income specialists "Looking to your future"

Bruce and Bernie will work with you to create a financial strategy designed to provide you and your family with peace of mind.

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