January 31, 2018
by Wilson Chen, BSc, DDS, CFP, FMA
This past July, the federal government introduced proposals to overhaul the tax rules affecting active private corporations (including dentistry professional corporations and technical services corporations). Since the summer announcement, the government has faced increasing opposition from farmers, professionals and small business owners across the country. As a result, they have backed away from some of their original submissions. At the time this article was written, we do not know what the final legislation will look like. However, the intent is clear. The federal government has indicated that they will target tax planning options of small business corporations in two major ways:
If the legislation is passed in its present form, an Individual Pension Plan (IPP) may be an attractive option for dentists trying to save for retirement. To better understand an IPP, let’s address some common questions.
WHAT IS AN INDIVIDUAL PENSION PLAN (IPP)
We all know someone who is part of a group defined benefit (DB) pension plan. Government workers, teachers, and employees of large corporations have historically enjoyed a set income at retirement that lasts for life. This provides a high level of comfort and security to retirees, knowing that they will continue to receive a guaranteed “paycheque”.
An Individual Pension Plan is very similar. It is a trust, sponsored and funded by your corporation, which provides a steady pre-determined income stream to you at retirement. The difference is that this is set up specifically for you (and possibly your spouse).
WHAT ARE THE REQUIREMENTS FOR SETTING UP AN IPP
WHO IS THE IDEAL IPP CANDIDATE
WHEN I START AN IPP, WHAT HAPPENS TO MY EXISTING RRSP
WHAT IS A PAST SERVICE CONTRIBUTION AND TERMINAL FUNDING
Past service contribution and terminal funding are two opportunities to put additional funds into an IPP. Contributions are made by the corporation and tax deductible to the corporation.
WHERE CAN I INVEST MY IPP FUNDS
WHAT HAPPENS IF THE INVESTMENT RETURNS IN MY IPP FLUCTUATE
We all know that most investment portfolios are not static. Returns tend to be variable, especially in the short term. To ensure that your pension is well funded for retirement, the actuarial firm responsible for your IPP will perform a review of the plan every three years (triennial review).
WHAT ARE SOME ADVANTAGES OF AN IPP
WHAT ARE SOME DISADVANTAGES OF AN IPP
HOW DO I START THE PROCESS
If you are in the right demographic to take advantage of an IPP, speak with your financial advisor to set up an actuarial review. This will detail how much you can save inside an IPP, any past service contributions you are entitled to, and the costs to run the plan. The personalized actuarial projection will help you, your tax professional and your financial advisor to weigh the cost/benefit and make an informed decision.
People are living longer and, in some cases, must fund a retirement that spans 30+ years. Without a public sector or corporate pension, dentists must rely on their own savings and careful tax and retirement planning to achieve financial freedom. To this end, an Individual Pension Plan may benefit those saving for retirement under a new proposed tax regime.
Statistics and factual data and other information are from sources believed to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not meant to provide legal, tax, accounting or account advice; as each situation is different, you should seek advice based on your specific circumstances. Securities-related products and services are offered through Raymond James Ltd., member – Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member – Canadian Investor Protection Fund.
Dr. Wilson Chen, BSc., DDS, CFP, FMA received his DDS from Western University in 1992 and over the past 23 years, has built a patient centered, family practice in Hamilton. In 2014, he sold his practice to take a more active financial management and business advisory role for his dental clients and their families. Wilson is the only practicing dentist in Ontario to hold the Certified Financial Planner (CFP) and Financial Management Advisor (FMA) designations. Wilson can be reached at email@example.com.
RELATED ARTICLE: Preventing Retirement Income Decay Like You Prevent Tooth Decay: The Personal Pension Plan
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