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Definted Benefit Pension Plan


randomep
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Hi all, just wonder from those of you have that experience in this. Let me start off by saying I don't really know the details of this plan, this belongs to a friend who is not very money savvy.  He is self-employed and made a lot of money one year.  On the advice of his accountant he set aside a big chunk of profits in a pension plan (and tax is deferred).  He insists it is defined benefit, not defined contribution.  I am familiar with defined contribution as I have 401k, RRSP, IRA.  But how does a person control this defined benefit plan.  Their bank/custodian don't like them and he wants to move it. So I was wondering where can he move the plan to?  Can he move it to a discount broker where he controls the investment decisions? Like a IRA?

 

 

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Hi randomep,

 

Will give it a try. Canadian perspective but I assume same principles apply elsewhere.

About 10 years ago, looked at this seriously and decided to pass. Have references if you want but here's a summary.

 

The idea is that, if you are incorporated or a business owner, you can maximize your tax-deferred nest egg.

 

There are definite advantages:

-can maximize contributions (above what is available with RRSPs as registered vehicles)

-especially as you get older (the contribution limit increases with age)

-can catch-up "past services" with lump payments (all tax deductible within the corporation)

-can aim for efficiency by including kids as potential beneficiaries (tricky and rules can change)

-all fees (including interest to some degree) are tax deductible within the corporation

 

There are definite disadvantages:

-need to set it up as some kind of trust (fees)

-need to register to CRA as a defined benefit pension plan (rules and regulations)

-need actuarial input at setup and periodic audits every three years (fees)

-the trust can de "self-directed" but you need to follow the "safety first" and the "prudent rule" approach and cannot put more than 10% of assets into any single investment

-need to transfer your existing RRSP assets into the plan to avoid "double dipping"

 

My understanding is that, in most cases, the disadvantages outweigh the potential advantages. A case can be made for someone who reinvested earnings into the corporation (no salary) and who is in a situation where the company becomes very profitable and somehow starts to think about retirement plans later on in life. Most people that I know who did this outsourced the entire process and IMO are not likely to be ahead in the end.

 

An option that was availbale was to let the funds inside the firm and use the vehicle as a partially tax-deferred "pension" asset. With the new Morneau rules, this is still possible as long as the firm does not produce significant operating income.

 

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Whoops - edited because I made a mistake. So our company's defined benefit plan is with a brokerage, but another company does the actual calculations/filings. (I wouldn't recommend going to a brokerage for the filings, because they charge a lot. For example, Schwab charges roughly double what our local person charges.)

 

So in our case, we're in charge of our portfolio and the other company just tells us how much we have to put into the plan every year.

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