Converting your Locked-In RSP to a Life Income Funds (LIFs)
Like many Canadians, you may have some of your retirement funds tied up in a locked-in RRSP, or locked-in retirement account (LIRA). This has become a popular choice for those who leave a company where they have earned the right to keep their accumulated pension benefits (known as vesting). Your other options may include transferring your funds to your new employer's plan, or leave the funds with your former employer's pension plan.
A locked-in RRSP is very much like a regular RRSP. The major difference is that a locked-in RSP falls under pension rules. Under the pension fund rules restrictions prevent you from turning your pension into hard, spendable cash. That's why, if you want to move your pension benefits into an RRSP account, the money is locked-in. You are prevented from withdrawing any funds - or collapsing the plan - until you reach a certain age, usually age 55.
(Beyond their names, the only significant difference between a locked-in RRSP and a LIRA is the controls imposed on them by provincial regulators. The term locked-in RRSP is used in Ontario, British Columbia, Nova Scotia, and Newfoundland, while the other provinces use the term locked-in retirement accounts.)
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FAQs about Locked-In RSPs
Have there been any major changes with Locked-In RRSPs?
Until recently, the big drawback of locked-in RRSPs was that, on maturity, your only option was to use the funds to purchase a life annuity. If this wasn't an appropriate vehicle for you, or if you simply wanted to have more control over your money, you were out of luck.
To address this problem, most provinces introduced Life Income Funds (LIFs). You can use your locked-in RRSP or LIRA funds to establish a LIF. You may also be able to do this using your pension funds, if allowed by the rules of your particular plan.
What are the benefits of a Locked-In RRSP account?
A Life Income Fund, or LIF, is an appealing retirement income alternative for people who are liquidating their locked-in registered pension plans or locked-in retirement accounts. It provides greater flexibility and investment options than an annuity.
What is the difference of a LIF and a RIF?
A LIF works like the more familiar Registered Retirement Income Fund (RRIF), but it must be used to purchase a life annuity by the time you are 80, except in Quebec. Until that time, a LIF allows you to invest in a wide range of instruments, and shelters the income from tax until you withdraw it. You also have some control over the timing and level of your withdrawals. LIFs also provide the same estate-planning flexibility RRIFs do. You can transfer the benefits to your spouse, name a beneficiary who will receive the remaining funds in a lump sum payment, or roll the LIF into your estate.
When must I start taking income from a LIF?
You must start taking an income from your LIF one year after you open the plan. From then on, until you turn 80, you can customize the amount and timing of your annual withdrawals as long as you stay within minimum limits set by the Canada Customs and Revenue Agency. Those minimums are the same as the minimum withdrawal requirements for a RRIF. Unlike a RRIF, though, you cannot use your spouse's age to determine your withdrawal schedule.
There are also maximums set on the amount you can take out each year. The maximum amounts are arrived at by calculating what you would receive if you used the funds in your LIF to buy an annuity-to-age-90. Because interest rates and annuity factors change from year to year, so will the maximums.
There are some eligibility restrictions on LIFs. You can't open one until you are within 10 years of the normal retirement age stipulated by your RPP, which usually means you must be 55. And the deadline for starting a plan is December 31 of the year you turn 71.
