18 November, 2020 Financial Planning Retirement Total Client Experience

When a Business Owner Should Not Own an RRSP

Business owner RRSP

You’re the owner of a small to medium-sized business. You don’t have a pension plan and because of the risks involved, you don’t want to rely solely on the value of your business for retirement income. In order to accomplish this, you have been annually maximizing your RRSP.

While the RRSP is certainly a fantastic vehicle, is it really the best vehicle for you?

Many business owners are not aware that they have an alternative to the RRSP called an Individual Pension Plan [IPP]. IPP’s are way a business owner can create their own defined-benefit pension plan that has several benefits not available with an RRSP. They include;

  1. Larger annual tax-deductible contributions
  2. Larger potential pension income
  3. Potential large upfront tax-deductible contribution (can be 6 figures)
  4. Tax deductible investment management fees

Potential tax-free role over to employed family members

Look at the chart below comparing potential accumulation of an IPP vs. RRSP.



 

In this example, an IPP produced $1,298,801 more cash at age 71 than an RRSP. With this big advantage, why wouldn’t every business owner want an IPP?

 

While an IPP is a fantastic strategy for many, it’s not right for everyone and there are disadvantages. Here are a few:

  1. No access to funds while employed and member of plan
  2. Minimum annual contribution requirements
  3. Higher start up and ongoing expenses vs. RRSP
  4. More stringent regulatory controls

A Wealth Planning Advisor well-versed in IPP’s is critical to the process of determining the suitability of an IPP. The Advisor should spearhead the conversation between the business owners, his/her accountant as well as arrange an IPP proposal from an actuarial firm specific to the business owner’s situation.

 

 

1. Serre Financial, August 8, 2016 sample for Business Owner born Dec 31, 1960, assume 7.5% average return for both IPP & RRSP