Individual Pension Plans for Incorporated Physicians

Individual Pension Plans (IPPs) are becoming increasingly relevant for incorporated physicians in Canada. Amidst changing tax landscapes, IPPs can offer unique retirement savings and tax advantages. This article explores IPPs, comparing them to other retirement options like RRSPs, and discussing their benefits and drawbacks.

 

What is an IPP?

An IPP is a defined-benefit pension plan tailored for a single individual. For incorporated physicians, the medical practice corporation makes contributions on behalf of the employee. It's designed to provide tax-deductible contributions from the corporation and tax-deferred growth within the plan​​.

 

Tax Advantages of IPPs

IPPs offer significant tax savings, especially under the new corporate rules on passive investment income. Contributions by the corporation can reduce its active income, while tax-deferred growth lowers corporate investment income. This makes IPPs an effective tool for physicians who have lost access to low corporate tax rates​​.

Comparing IPPs with RRSPs: One of the main advantages of IPPs over RRSPs is higher contribution limits, particularly after age 50. This feature allows for more substantial retirement savings in a shorter time, beneficial for those starting retirement savings later in life​​.

 

Advantages of IPPs:

• Tax-deductible contributions: The corporation's taxes are reduced, providing immediate tax savings.
• Deductible expenses: The corporation can deduct various associated costs, including actuarial and accounting fees.
• Tax-deferred growth: Assets in the plan grow tax-deferred, and IPP assets are protected from creditors.
• Top-up contributions: Allow for additional tax savings when returns are insufficient to fund promised benefits.
• Past service contributions: Enable significant contributions for past service, enhancing retirement benefits.
• Pension splitting: Facilitates partial income splitting in retirement.

 

Disadvantages of IPPs:

• Higher costs: IPPs involve significant set-up and ongoing administrative costs.
• Compliance: Strict adherence to regulations is required to avoid serious tax consequences.
• Reduced RRSP room: Contributions to IPPs reduce available RRSP contribution room.
• Withdrawal restrictions: Funds are locked in until retirement, limiting flexibility.

Conclusion:

IPPs can be a valuable retirement and tax planning tool for incorporated physicians, particularly those who are older and have high earnings. However, considering their complexity, costs, and compliance requirements, it's vital to seek professional advice to determine if an IPP aligns with your specific financial goals and situation​