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If you think it’s too good to be true
– check it out carefully!

Written by Gill Campbell for Synergy Magazine,
September 2005

While having a pint of their great beer at Longwood Station, a friend commented that he had seen one of my articles in this excellent magazine.  He told me that he was seriously thinking about buying an IRP rather than using an RRSP to fund his retirement. 

An “IRP”!  Basically, an individual buys a life insurance policy that includes a savings account that grows tax-free.  When you retire, you use the IRP as collateral at the bank and borrow enough to live on, knowing that the life insurance will repay the bank when you die.  There is a risk that the bank may not offer you a loan.  Also it is based on current tax laws which may change.

My friend told me that he thought it was too good to be true but had researched it on the web and was more convinced that it is a great idea.  He was captivated by the idea of avoiding the tax on RRSP withdrawals.

I was intrigued and asked him how much he has in his RRSP – to which he answered “Not much”.  Well, does he fit the profile of someone who really benefits from use of an IRP? 

In fact, industry literature suggest that an IRP Strategy is excellent for additional retirement funds for individuals who:

  • need life insurance
  • are paying taxes in a high marginal tax rate
  • have already maximized their RRSP and/or pension contributions
  • are paying tax on non-sheltered investment income
  • have an investment horizon of at least ten years with guaranteed income.

So let’s go back to my friend –he does not fit this profile and may need to look carefully at his strategy.  If he invests $500 a month in an RRSP over 10 years, it will be worth $70,000 to $80,000.  It will have cost $6,000 a year less the tax rebate – about $45,000.  If he contributed $4,500 annually to an IRP then he would have life insurance if he died.  However, the cash value will be lower than those in RRSP with the same interest rates, because of the cost of the life insurance.

Over time they both look good savings plans, but what are the real differences?

What happens if he becomes disabled or critically ill in 5 years time and he cannot afford any further investment?  His income will be EI for four months, then nothing.

If he chose the RRSP investment, he will have invested $22,500 and it will be worth over $30,000.  He can cash some of this out as he needs it, pay taxes and hope to get better soon.  If he chose the IRP route, he would get very little back if he cashed out.

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Gill Campbell is a certified financial planner and an independent insurance broker.  Please email me with specific areas that you would like me to consider in developing future columns
Gill, Chris and Kayla