New retirement savings options available for small business owners

Farmers will soon have a new option for tax-effective retirement savings for themselves and their employees.

Federal legislation to create Pooled Registered Pension Plans (PRPP) was introduced last fall, has received second reading and has gone to committee.

PRPPs are intended to be a broad-based, low-cost, defined pension option that will be available to all employees, employers and self-employed individuals.

It will offer the benefits of participating in a large pension plan such as the defined contribution plans that many large companies offer, and will also allow employers to offer retirement savings without the cost of setting up a pension plan and administering it.

PRPPs will make it more attractive for small business owners to offer pension plans to their employees because most of the responsibility will be passed to a third party administrator such as a financial institution. The administrator will be responsible for managing the pension fund and day-to-day administration, which lowers the costs that are passed down to users.

PRPPs also offer the same tax benefits as Registered Retirement Savings Plans. Like RRSP contributions, PRPP contributions will be tax-deductible.

A participant’s combined PRPP contributions and RRSP contributions will be subject to the current annual RRSP limit of 18 percent of the previous year’s earned income, up to a maximum of $22,970 for 2012.

Individuals will be able to transfer their savings between PRPPs, so they’re not wedded to one plan.

Employers are not required to contribute to employee PRPPs, but they can choose to match their contributions either fully or partially.

Employers who choose to contribute will be able to deduct PRPP contributions, but contributions will apply immediately, unlike some pension plans in which employer contributions do not apply until the employee has been with the company for a set time.

Employers will not be required to report pension adjustments for employee and employer contributions as they would for an employer-sponsored registered pension plan. As a result, the PRPP option should be easier to administer.

To receive a pension from a PRPP, employees will have the same options that are available to defined contribution pension plan members: the purchase of a life annuity, transfer to an RRSP or Registered Retirement Income Fund (RRIF), or payment of benefits similar to RRIF benefits from the employee’s PRPP account. Employees will pay tax on these payments, just like other pensioners.

Owners of small businesses may have more retirement options than they realize because there are many different ways to save money toward an otherwise uncertain future.

There are many unique tax issues that you need to consider and it is important that you take the time to consider both short- and long-term planning issues that will help minimize the tax that you and your family have to pay.

Retirement tax planning can be sophisticated and requires careful planning advice. Talk to a professional adviser to help you determine which retirement option would be best for you.

Doug Hewko and Ebony Verbonac of KPMG contributed to this column.

Colin Miller is a chartered accountant and partner with  KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca. 

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