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Individual Pension Plan (IPP) – An RRSP for the Affluent

For the average income in Canada, the maximum RRSP contribution amount of $21,000 (for 2009) is more than what most employed workers are allowed to contribute.  To put this in perspective, in order to qualify for the $21,000 contribution limit, an employee would need an income of around $117,000, well above the average Canadian salary.

However, what about those who make higher salaries? Take physician salaries for instance, a hospital specialist can make $300,000 a year with very little in the form of overhead fees.  If that specialist maxes out his RRSP of $21,000, it will only represent 7% of his income.  So does making a high income result in fewer tax deferral retirement account opportunities?

There is another option for the wealthy, it’s called the individual pension plan (IPP).

What is the Individual Pension Plan (IPP?)

An IPP is an alternative to the RRSP for executives/business owners with higher incomes.  It is a defined benefit plan that both employee and employer contribute to but with higher contribution limits (compared to an RRSP).

How much can you contribute to an IPP?

According to an article by Jonathan Chevreau:

IPP’s upper limits are established by an actuarial valuation conducted once every three years. The older the IPP member, the higher the contribution amount, assuming comparable income levels.

Who should consider using the IPP?

According to KPMG,

  • a key executive and/or owner-manager of a corporation
  • over 40 years old; and
  • earning a base salary of more than $100,000

What are the Benefits of the IPP?

  • An IPP allows the (older) plan holder to contribute more than an RRSP would allow.
  • IPPs are creditor proof while RRSP’s are not.
  • The IPP account holder can guarantee their retirement income as it is a defined benefit plan.  Compared to an RRSP where retirement income largely depends on market performance.

What are the drawbacks of the IPP?

  • Access to the IPP funds are locked until retirement.
  • Setup costs are higher than an RRSP.

Final Thoughts

This is a very brief primer on the individual pension plan as the details get quite a bit more extenisve.  As mentioned above, the individual pension plan is meant for those with higher incomes, at least 40 years old and ownership interest in the corporation that they work for (ie. plan to retire with the company).  If there are any readers currently on an IPP, it would be great to hear your experiences.

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 10 comments… add one }
  • Novice June 25, 2009, 11:27 am

    I thought that RRSPs are creditor protected as of 2008… am I mistaken?

  • Tob June 25, 2009, 12:06 pm

    I’m guessing this is not deductible like RRSPs?

  • Xenko June 25, 2009, 12:22 pm
  • DavidV June 25, 2009, 12:29 pm

    I’m hopeful to have the money to need an IPP one day! Not yet though.

  • FT FrugalTrader June 25, 2009, 2:38 pm

    Tob, I believe the IPP works like a DBP so the employee contribution portion is tax deductible.

    Xenko, thanks for the heads up, I did not know that.

  • Riscario Insider June 28, 2009, 2:07 pm

    Thanks for this introduction to IPPs. Nice title.

    You can learn more about IPPs at http://bit.ly/IPPFAQ. This site from Westcoast Actuaries also discusses Retirement Compensation Arrangements (RCAs) – An IPP for the Ultra Affluent.

  • auto insurance rates guy July 1, 2009, 10:57 pm

    Wow, I’ve never heard of this before. I wouldn’t mind being in the position to qualify (and need) an IPP.

  • Tom Napiontek May 9, 2012, 4:16 pm

    I think another significant downside to the IPP is that you can’t hold a mortgage in it like you can with a RRSP.

  • Ed Rempel May 10, 2012, 1:22 am

    Tom,

    When you analyze the strategy of holding a mortgage in an RRSP, you can see that it is almost always a dreadful idea. We see it as a combination of:

    – the most expensive mortgage in Canada
    – a poor RRSP return
    – high fees.

    In general, unless you are a GIC investor, you should be able to invest to make a much higher return than your mortgage rate, especially today when you can get a mortgage below 3%.

    Ed

  • frank callaghan December 7, 2012, 5:06 pm

    where can we find a discount broker that can handle an ipp account. all the major brokerage houses want you to use an advisor

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