Maximizing retirement savings is crucial for dentists to ensure financial security in their later years. By saving as much as possible, dentists can better prepare for unexpected medical costs that may arise, protect themselves against economic downturns, support their legacy goals, and comfortably support themselves through their retirement years. One of the best ways dentists can save for retirement and reach their goals is with an individual pension plan (IPP).
What is an IPP?
An IPP is a type of retirement savings plan designed primarily for business owners, incorporated professionals, and key employees. It allows dentists to contribute a significant amount of money towards their retirement, providing a structured way to save and invest for the future. There is more contribution room than a registered retirement savings plan (RRSP), dentists can gain tax advantages, and they are ideal for dentists aged 40-65 with higher incomes. Another significant advantage is the defined benefit nature of many IPPs which guarantees a specific payout in retirement based on a predetermined formula. This can offer greater financial security for dentists than other contribution plans, where retirement payout depends on investment performance. Furthermore, IPPs can also serve as an effective tool for estate planning. Upon the death of the plan holder, the remaining assets can be passed on to beneficiaries, often in a tax-advantaged manner.
IPP Tax Advantages
If you own a dental practice, an IPP can save you even more money, but the IPP has to be established by an incorporated business. This allows for business contributions or administrative costs to be tax-deductible. As a dentist you’ll also have access to various investment options, such as real estate or private companies. Come time to transfer wealth, should you choose to pass it down to a spouse, child, grandchild, etc., an IPP provides much more flexibility than an RRSP. If your spouse or child is employed within your dental company and also earning a higher income, they can become members of the IPP, meaning the next generation you wish to transfer the wealth to can receive it without tax implications.
Contribute More Than a RRSP
You can make up to 65% higher contributions than those allowed under RRSPs, although the contributed amount will depend on your income and years of service. But even as your cash flow changes or varies, you’ll be able to switch between contributing to each type of plan.
When You Retire
When the time finally comes to retire from dentistry, you can receive a monthly pension from the IPP, but you also have several other options such as transferring the IPP to a registered product, or buying an annuity from a life insurance company. You must start receiving income from your IPP by the end of the year you turn 71. When you die, any remaining value goes to your surviving spouse, child, or your estate, however, you can receive your pension before turning 65 (or even as early as 50).
Is an IPP Right For You?
Determining if an individual pension plan is right for you involves assessing your retirement goals, financial situation, and risk tolerance. Firstly, consider your retirement goals and timeline. If you want more control over your investment decisions and the potential for higher returns, an individual pension plan may be suitable. Secondly, evaluate your current financial situation and whether you have the discipline to consistently contribute to the plan. If you have a stable income and can afford to set aside additional funds for retirement savings, an individual pension plan could be beneficial. Lastly, consider your risk tolerance and investment knowledge. If you are comfortable managing your investments and willing to take on market risk, an individual pension plan may be a good fit. Ultimately, the best way to determine if an IPP is right for you is by consulting with a financial advisor who can help you determine if an individual pension plan aligns with your retirement objectives and overall financial plan.
An IPP Can Have Many Benefits
Individual pension plans are beneficial for their higher contribution limits, tax advantages, predictable income in retirement, and potential for effective estate planning. They are particularly well-suited for dentists who are looking to secure a stable financial future in their retirement years. If you want to determine if it’s the best financial plan for you, consult with our Dental Tax professionals to discuss this in more detail. We work hard to guide dentists through maximizing their profits, growing their businesses, and achieving their long-term retirement goals.
Adam has an MBA from the Richard Ivey School of Business in London and also holds a Chartered Investment Manager designation.
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