Retirement Income: Understanding RRIFs and LIFs

December 13, 2023

Throughout our lives we all dream about retirement. We think about our goals and what will make retirement fulfilling. In addition to continuing to fund our fixed expenses, we may also have other retirement goals we hope to accomplish. Accessing the money saved over the years in retirement savings plans like an Registered Retirement Savings Plan (RRSP) and Locked-in Retirement Account (LIRA) are two options for retirement income.

Registered Retirement Income Fund (RRIF) vs Life Income Fund (LIF)

The most common investment account to save for retirement is the RRSP, which has several benefits that we take advantage of during our working years but eventually we must turn our RRSP into an income stream to supplement the government pensions and possibly pension plans earned through an employer. This process is called converting an RRSP investment account into a Registered Retirement Income Fund (RRIF) and must be completed by the age of 71.

A RRIF is a registered investment account out of which a set minimum amount must be withdrawn annually. There is no minimum age to open a RRIF to provide an income stream.

A LIF is a registered investment account funded from a Locked-In Retirement Account (LIRA), locked-in pension funds or locked-in RRSP. An employer may provide their employees with funding for their retirement through a Registered Pension Plan. Upon leaving the employer and if the funds are vested, the employee may have the option of removing the accumulated amount and transferring into a LIRA. The key difference is the restriction to withdrawals depending on the locked-in jurisdiction. There is a minimum age wherein a LIF account can be opened, along with minimum and maximum withdrawal amounts. There are financial hardship guidelines that may allow for withdrawals of locked-in accounts.

Both RRSPs and LIRAs must be collapsed into the corresponding RRIF and LIF in the calendar year that the holder reaches age 71. The allowable investments include mutual funds, stocks and bonds and Guaranteed Investment Certificates (GICs). The amounts removed are taxable income in the calendar year withdrawn.

RRIF and LIF Withdrawal Amounts

• No minimum withdrawal amount mandated in the year a RRIF/LIF is established

• Minimum withdrawal percentage is based on your age at the beginning of each year and the value in the RRIF/LIF, the minimum withdrawal percentage increases each year

• A RRIF holder may opt to use their spouse’s age to calculate the withdrawal amount

• A RRIF has no restriction on the maximum amount that can be withdrawn in a calendar year

• A LIF has a stipulated maximum amount that can be withdrawn annually

Taxation

Both RRIF and LIF payments are taxable income for the year in which they are received. While the monies are invested within the registered accounts the growth remains tax sheltered.

Things to consider when setting up a RRIF

• what age do you need to begin withdrawing funds

• how much income is required and therefore how much will be withdrawn

• what other sources of income are coming in

• what is the total taxable income being received annually and what is the income tax liability on this income

• is there an advantage to using the younger spouse’s age for the minimum withdrawal amount in order to keep the funds in the tax deferral account longer. This will keep capital in the account for an extended period of time allowing for additional tax sheltered growth and a decreased amount to be added to taxable income.

Estate planning and the consequences if a RRIF/LIF holder dies

With RRIF/LIF accounts the holder can name a beneficiary or a spouse as a successor annuitant. If a spouse is named as the successor annuitant, any funds left within the RRIF/LIF are transferred with no taxation to the surviving spouse’s RRIF or RRSP (if under the age of 71). If the holder has named a child or any other individual as the beneficiary, the amount left within the registered account is taxable income to the estate of the holder and taxes will be owing. If no beneficiary or successor annuitant is named, the remaining value at time of death will be added to the estate assets and divided as per the Will (if the deceased had a valid Will at time of death) or the applicable succession laws will be applied if the holder died intestate (no valid Will at time of death).

There are many considerations that must be evaluated before entering into retirement. One of the main examinations are each individual’s goals for retirement and the costs associated with funding these goals. How much annual income will be required and where will this income come from? Throughout your various life stages and working career much thought and care are needed to ensure your retirement savings accumulate. Then once you reach your retirement stage, the final decision needed will be to convert your RRSPs and/or LIRAs into an income stream through a RRIF or LIF. Key to retirement success is finding the balance between funding our dreams and not outliving our assets. Speaking with a financial advisor will help in understanding your options.

FirstOntario Credit Union in partnership with Credential Securities and Credential Asset Management Inc. has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

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