What is a LIF and how does it fit into your retirement?
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If you have funds from a previous employer’s pension stored in a Locked-in Retirement Account (LIRA), you may be wondering what happens to those untouchable savings once you reach retirement age.
While some may choose to purchase a life annuity, many LIRA holders will need to convert the locked-in account to a Life Income Fund to begin making withdrawals.
In this guide, we’ll learn more about the process of transferring your LIRA-held retirement savings to a LIF, as well as how the LIF compares to other retirement savings and investment options.
What is a LIF?
If you previously rolled over pension funds from a former employer into a Locked-in Retirement Account (LIRA), you may be wondering what happens to those savings once you become eligible to “unlock” the money.
If you’ve been thinking of your retirement savings options as “LIRA vs LIF”, a more accurate formula would be “LIRA, then LIF”. That’s because the LIF isn’t an alternative to the LIRA: it’s the next step in the “unlocking process” when your retirement savings start to become retirement income.
Learn more about unlocking a LIRA here.
The short answer? A Life Income Fund (LIF). (Or, in some provinces, a Locked-in Retirement Fund (LIRF).) As part of the unlocking process, you’ll convert your LIRA to a LIF, which means you’ll be able to manage your investments independently and begin withdrawing funds.
How does a LIF work?
As you near retirement age, you’ll want to have access to pension funds you rolled over into a LIRA when leaving a former employer. This “unlocking” process can begin as early as 55, but in any case, must be completed no later than the end of the calendar year in which you turn 71.
The specific rules for unlocking your LIRA will vary based on where you live and your provincial pension regulations. For help understanding your unique circumstances, you may want to speak with a certified financial advisor.
Good to know
The funds released from a LIRA must go towards supporting you during retirement. You can choose either to purchase a life annuity - an insurance policy that ensures you receive a fixed payout each month for the remainder of your life - or convert your LIRA into a LIF.
If you opt to convert your LIRA into a LIF or LIRF, you’ll have the option to manage your money independently, investing in stocks, mutual funds, exchange-traded funds and other assets. You’ll also begin making withdrawals at a set rate determined each year by the Canadian Revenue authority. As with a LIRA, the funds in your LIF grow tax-free.
What are the advantages and disadvantages of a LIF?
As with any Registered Retirement Savings Plan (RRSP), there are advantages and disadvantages to choosing a LIF over a life annuity when unlocking a LIRA.
Pros
- You have the ability to choose how to invest your savings and grow your retirement income. (Or to hire a financial professional to manage them on your behalf.)
- Money in a LIF can continue to grow, tax-free for the life of the account. That means you don’t pay capital gains taxes on any increase in value.
- Because you’re not required to begin making withdrawals from a LIF until you turn 71, your money has more time to grow.
- If you run into financial trouble, the funds in your LIF are protected from creditors.
Cons
- Because you can’t open a LIF until you reach retirement age, your money has less time to grow than it might in another type of RRSP.
- Other than the initial contribution of rolled-over pension funds, you cannot add money to a LIF.
- Not all types of investments are permitted by a LIF. If your retirement planning includes some out-of-the-box strategies, you may need to consider other account types.
- Withdrawal rates set by the CRA mean that you’re required to take a certain amount of money from your LIF each month - and that you can’t take more than a specified amount.
When can I convert my LIRA to a LIF?
As a general rule, a LIRA has to be converted to a LIF by December 31st of the year in which you turn 71.
Corinne was born on March 5th, 1953. In 1980, she left her job as an elementary school teacher and opted to roll over her accumulated pension savings into a LIRA. Corinne has until December 31st of 2024 to either convert this account to a LIF or use the funds to purchase a life annuity.
Most provinces allow you to convert up to 50% of the value of a LIRA into a LIF at the age of 55, whether you intend to retire immediately or not. In this “partial unlocking” scenario, the remaining funds will stay in the LIRA until you retire, at which point you can add them to your LIF.
Michel was born on June 1st, 1966 and worked as a city employee for ten years before transitioning to the private sector. During that time, he saved $20 000 towards retirement with the help of his employer-backed pension - money that he transferred to a LIRA when he left his job with the city.
Due to prudent financial management, Michel’s savings increased in value to $36 000 by the year 2021. Also in 2021, Michel celebrated his 55th birthday. In order to best support his retirement savings goals, Michel decides to partially unlock his LIRA, transferring $18 000 to a LIF so that he may invest more aggressively. The remaining $18 000 remains in Michel’s LIRA until he decides to retire or reaches the age of 71.
What is the difference between a LIF and an LRIF?
Practically speaking, the LIF and LRIF have a lot in common. Both are designed to function like a LIRA in reverse: instead of holding retirement savings for safekeeping, the LIF and the LIRF help you manage payouts responsibly to ensure you have a consistent lifetime income.
If you live in Newfoundland and Labrador, you have the option to move retirement savings stored in a LIRA to an LRIF, rather than a LIF. In all other provinces, you’ll transfer LIRA funds to a LIF.
That’s not the only difference, however. Withdrawal rates for an LRIF differ from those for a LIF and, unlike the LIF, which must be converted into an annuity by the time you reach 80, you can keep your LRIF to bequeath to a beneficiary.
What is the difference between an RRIF and LIF?
Think of your retirement savings like water in a bucket. In the case of the RRSP and the LIRA, you’ve poured your valuable water into a bucket with no holes and maybe even a locked lid.
Now that it’s time to start using that water, you want to make sure you don’t drink too much, too soon. Instead of installing a faucet on your LIRA or RRSP bucket, you pour your water into a new bucket with carefully-drilled holes: a Registered Retirement Income Fund (RRIF) or a Life Income Fund (LIF). Thanks to the holes in these buckets, you’re assured of a steady supply of drinkable water without worrying that you’ll run out.
Good to know
Learn more about RRIF Accounts
When considering whether to move funds into an RRIF or a LIF, you need to look first at the source of the money. Savings stored into a LIRA can only be converted into a LIF, while funds from an RRSP can be transferred to an RRIF or other account - but not a LIF.
Other important factors in the RRIF vs LIF decision? How much money will you need to withdraw annually to support yourself and your loved ones? Returning to our bucket analogy, the LIF has significantly smaller “holes” in the form of maximum withdrawal rates set by the CRA. The CRA has no maximum withdrawal limit for an RRIF.
Both RRIF payments and LIF payments arrive in your account monthly, although some provinces allow for quarterly or annual lump-sum withdrawals.
What happens to a LIF after death?
In most cases, the automatic beneficiary of your LIF will be your spouse. If you and your partner live in either Quebec or Ontario, your surviving spouse can transfer the funds to an RRSP or RRIF in his or her name. Funds in a federal LIF, however, can only be moved to a new LIF held by your partner.
Haoyu and his wife, Xinyi, have lived in Toronto all their lives. When Haoyu passes away in 2021, Xinyi chooses to move Haoyu’s retirement savings from his LIF into an RRSP managed by her son.
Emma and Miles have been married for over three decades. Each has named the other as the beneficiary of an individually-held, federally-regulated LIF. When Emma dies, Miles must transfer the remaining funds in her LIF into his LIF.
Unmarried partners can designate one another as beneficiaries, as well as children and grandchildren in case one partner predeceases the other.
Can you withdraw money from a LIF?
Federal LIF unlocking rules, as well as those set by most provinces, require that your LIF funds remain “locked-in” to ensure that you have access to a guaranteed income during your retirement years.
That said, federal LIF unlocking rules, Alberta LIF unlocking rules, as well as Ontario LIF unlocking rules do allow you to make a one-time withdrawal once you reach 55. Manitoba’s LIF unlocking rules lower the age to 50.
You can receive the funds in cash, in which case you’ll pay tax on the amount, or transfer the money tax-free to another RRSP.
Some provinces, including Nova Scotia and Quebec, will allow you to make an annual withdrawal on top of your minimum or maximum LIF withdrawals. This “temporary income” may be useful to those hoping to maximize their withdrawals while minimizing their tax burden in a given year.
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How much can I withdraw from a LIF each year?
The amount of money you can withdraw from a LIF will vary depending on a number of factors, including how much you have saved in your account and your age at the time of the withdrawal.
In general, however, you are required to take a certain amount from your LIF each year based on LIF withdrawal rates set by the CRA every year. You’re also limited in how much you can withdraw. The minimum rates for a LIF are the same as those for an RRIF.
To help you understand how much you can expect to withdraw from your LIF, we’ve prepared the following LIF maximum payment amount table:
| Age (January 1st) | LIF Minimum Withdrawal | LIF Maximum Withdrawal |
|---|---|---|
| 54 | 2.78% | 6.45% |
| 55 | 2.86% | 6.51% |
| 56 | 2.94% | 6.57% |
| 57 | 3.03% | 6.63% |
| 58 | 3.13% | 6.70% |
| 59 | 3.23% | 6.77% |
| 60 | 3.33% | 6.85% |
| 61 | 3.45% | 6.94% |
| 62 | 3.57% | 7.04% |
| 63 | 3.70% | 7.14% |
| 64 | 3.85% | 7.26% |
| 65 | 4.00% | 7.38% |
| 66 | 4.17% | 7.52% |
| 67 | 4.35% | 7.67% |
| 68 | 4.55% | 7.83% |
| 69 | 4.76% | 8.02% |
| 70 | 5.00% | 8.22% |
| 71 | 5.28% | 8.45% |
| 72 | 5.40% | 8.71% |
| 73 | 5.53% | 9.00% |
| 74 | 5.67% | 9.34% |
| 75 | 5.82% | 9.71% |
| 76 | 5.98% | 10.15% |
| 77 | 6.17% | 10.66% |
| 78 | 6.36% | 11.25% |
| 79 | 6.58% | 11.96% |
| 80 | 6.82% | 12.82% |
| 81 | 7.08% | 13.87% |
| 82 | 7.38% | 15.19% |
| 83 | 7.71% | 16.90% |
| 84 | 8.08% | 19.19% |
| 85 | 8.51% | 22.40% |
| 86 | 8.99% | 27.23% |
| 87 | 9.55% | 35.29% |
| 88 | 10.21% | 51.46% |
| 89 | 10.99% | 100.00% |
| 90 | 11.92% | 100.00% |
| 91 | 13.06% | 100.00% |
| 92 | 14.49% | 100.00% |
| 93 | 16.34% | 100.00% |
| 94 | 18.79% | 100.00% |
| 95 | 20.00% | 100.00% |
What are the LIF withdrawal tax rates?
All withdrawals from RRSPs or LIFs are taxed and are added to your annual income.
When you make a withdrawal your financial institution will withhold the tax. The rate of tax is determined by the province you live in and the amount you withdraw.
| Amount Withdrawn | Rate of Tax |
|---|---|
| up to $5,000 | 0% (5% in Quebec) |
| $5,000 - $15,000 | 20% (10% in Quebec) |
| $15,000+ | 30% (15% in Quebec) |
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