Why Dentists Should Consider an Individual Pension Plan (IPP)

by Jordan Schaffran, Silver Cedar Wealth Management

From greater savings to protection, an IPP offers more for Canada’s high-income professionals

Most people are familiar with an RRSP (Registered Retirement Savings Plan). While an RRSP is ideal for many, an IPP offers unique advantages for dentists.

The IPP is custom-designed and takes into account each participant’s needs and personal situation. The contributions required to finance the plan vary from person to person, based on factors such as age and income.

An IPP (Individual Pension Plan) allows you the potential to save significantly more versus an RRSP plan and gives you the opportunity to put aside more for retirement. These savings are achieved through higher contributions in an IPP which leads to a greater amount of tax deferral in an IPP.

The IPP is generally most advantageous for dentists who are 40 years of age or older, and who want to contribute more money on a tax-sheltered basis than the maximum permitted for RRSPs. The IPP must be established by an incorporated company.

What are the main differences of an IPP versus an RRSP?

An IPP is a defined benefit pension plan that allows for greater tax-deferred contributions than an RRSP. Your annual pension is calculated by your years of employment and level of T4 income.

With an IPP, you will have the security of knowing how much you will receive in retirement. An RRSP, on the other hand, does not provide a defined, fixed income. With an IPP, you can have better peace of mind and be better able to plan your life post-retirement.

One of the more attractive features of an IPP is that past service may be used to increase contributions and retirement income. You can make up for the years of service if you may not have contributed enough for retirement. Any contributions for past service are considered a tax-deductible payment.

Essentially, an IPP is designed to act much like a large-scale public sector pension plan, which provides a known benefit at retirement.

Top five benefits of opening an IPP

Now that you are familiar with the differences between an IPP and RRSP, let’s take a look at some of the reasons why an IPP may be best for you:

1) IPP plans are designed for high-income business owners such as dentists

If you are a high-income professional such as a dentist- with a T4 income – then an IPP has been designed to meet your specific needs.

Each year, you can decide if your IPP pension benefit will be accrued using a defined benefit plan method. You can also choose a more traditional defined contribution plan method, such as an RRSP. No matter which contribution method that you choose, you will be able to enjoy a fixed income upon retirement.

2) With IPPs, you can contribute more towards your retirement.

As a high- income professional, an IPP is better designed to allow you to make the most of your contributions. In fact, you can make up to 65% higher contributions than those allowed under RRSPs. Of course, the exact amount of contributions will depend on different factors, most notably T4 income and your years of service.

Here is a look at how higher contributions via IPP can benefit you versus the traditional RRSP plan.

The example assumes a maximum annual income in salary and annuity increase of 5.5%, 3% indexing of annuities, and retirement at age 65. Source: https://ssq.ca/sites/default/files/archives/aii/Investissement_Documentation/IPP_Brochure_BRA1458A_201201_WEB.pdf
The example assumes a maximum annual income in salary and annuity increase of 5.5%, 3% indexing of annuities, and retirement at age 65. Source: https://ssq.ca/sites/default/files/archives/aii/Investissement_Documentation/IPP_Brochure_BRA1458A_201201_WEB.pdf

In this example, we will compare the IPP versus an RRSP with a return of 7.5% for a 45-year-old business owner who earns $145,000 annually.

Under an IPP, the same business owner is able to contribute more than an RRSP and accumulate a substantial amount of savings for their retirement.

The example clearly shows that the IPP allows the business owner to have a greater amount of retirement savings. Also, it does not include past years of service which can allow for additional contributions to the IPP.

If investments within the IPP return less than 7.5% in any given year, you may cover the shortfall through additional contributions. This is a tax-deductible expense for the company.

3) IPPs provide flexibility to handle your varying cash flow

Chances are that your cash flow varies year to year. With the IPP pension, you are able to switch between each type of plan. For instance, if your business happens to have less cash flow, then you can switch to the less expensive contribution plan, such as your RRSP.

4) With an IPP, you get to enjoy creditor protection, tax deductions and access to greater investment vehicles.

When you enroll in an IPP, you are able to enjoy a number of tax deductions for your corporation. This includes deductions on all of your investment and administrative fees.

Also, IPP assets enjoy creditor protection by provincial legislation. This type of creditor protection is not available for RRSPs in Ontario unless you have declared bankruptcy. In fact, an RRSP can only provide creditor protection if issued by a life insurance company.

Finally, you are able to invest in a number of investment vehicles that are not available from RRSP. Some of the exclusive investment vehicles include the following:

  • Investment in real estate
  • Investment in private companies

5) With an IPPs, you can allow wealth transfer tax-free

If you want to ensure that your wealth can be passed to a spouse or a child, then an IPP will provide you with much more flexibility versus an RRSP.

For example, an RRSP is a fully taxed amount for the death of the second spouse. This tax can only be deferred to a spouse or a disabled child. If you have no spouse, then the RRSP is fully taxed upon your death.

If your spouse or child is employed in your company and earning a T4 income, they can be eligible to become members of the IPP. This allows IPP wealth to be passed to the next generation without incurring tax.

The smart choice for dentists

Overall, there are a number of advantages of opening an IPP, especially if your financial situation makes it easy for you to set up this type of account. Here is a summary of the benefits that an IPP offers over an RRSP:

  • Designed for high income professionals
  • Allows for defined benefits upon retirement
  • You can contribute more towards your retirement
  • Offers more tax deductions
  • Offers better creditor protection
  • Provides greater flexibility according to your cash flow
  • Permits you to make up for years of service by contributing additional funds
  • Allows you greater access to different types of investments
  • You can transfer your wealth tax- free

Being prepared for retirement

While the government of Canada offers a number of social services for those of retirement age, a comfortable retirement is dependent on taking decisive action on your savings and investing strategy today. Therefore, it is important that you take action to plan your retirement as soon as possible.

This information is based on data that we believe is accurate and complete, but we do not represent or warrant that it is accurate or complete and it should not be relied upon as such. This information should not be construed as offering investment, tax or legal advice. Before acting on any of the information provided, please contact your advisor for individual financial advice based on your personal circumstances. The views that may be expressed here are those of the author only and not necessarily those of Worldsource Securities Inc., its employees or affiliates. Worldsource Securities Inc., is the sponsoring investment dealer and the member of Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. 

About the Author

Jordan Schaffran is a Wealth Advisor at Silver Cedar Wealth Management, helping dentists achieve important financial milestones. He provides independent, forward-thinking advice that aligns with clients’ objectives and offers a holistic approach to their wealth management needs. To contact Jordan and discuss your wealth management goals, email jschaffran@worldsourcesecurities.net.