Making Your Retirement Easy Breezy with RRIFs and LIFs
October 21, 2020
If you’re nearing your retirement years, you know that the prospect of retirement can be both very exciting and a wee bit anxiety inducing. Exciting because you finally get to sleep in late, spend more time with your grandkids, volunteer and finally travel…when the pandemic subsides; anxiety-inducing because you cannot help but have some serious concerns such as “how much money do I need to retire” and “how much will I spend in retirement”? To ensure that this time is as enjoyable as possible for you, it’s good to know the basics of retirement withdrawal products, including RRIFs and LIFs – because retirement has a tendency to creep up on all of us!
What are Registered Retirement Income Funds (RRIFs) and How Do They Work?
You’ve been diligently saving in your registered plans over the years and are now prepared to reap the benefits of the investments you’ve built. Here is how your RRIF withdrawals work. As a taxpayer, you may contribute to your RRSP up until the end of the year in which you turn 71 years old. By no later than this age, these accumulated funds must be converted into a RRIF, from which a minimum withdrawal must be made each year (we review these calculations below).
RRIF withdrawals constitute income and will be taxed at your then-applicable marginal tax rate – this is based on your province of residence and income. You can collect your annual RRIF payments monthly, quarterly, semi-annually or as a lump sum at any time – just make sure that the total amount taken equals the minimum withdrawal amount. Many people choose to make a withdrawal at the end of the year so the funds can grow tax-free as long as possible, but it really depends on your income needs. You should also keep in mind that although there is no maximum withdrawal amount, any amount withdrawn in excess of the minimum is subject to withholding tax.
While there is no age limit on how long a RRIF can be maintained, RRIF payments are designed to continue for the remainder of your life. Your minimum withdrawal amount is calculated by multiplying the market value of your RRIF on January 1st of the year by a prescribed rate based on your (or your spouse’s) age. Prescribed withdrawal rates change annually and can be found on the CRA website.
The first payment must be withdrawn by the end of the calendar year following the year in which you set up your RRIF. For example, if you set up the RRIF in 2020, you must begin withdrawing income in 2021. As with an RRSP, a RRIF must be collapsed upon death of the accountholder and its full value is included on the deceased’s terminal return and subject to tax. If however, the beneficiary of your RRIF is your spouse or a financially dependant child, then the full value of the proceeds will be paid to the beneficiary on a tax deferred basis.
What Are Life Income Funds (LIFs) and How Do They Work?
If you previously worked for a company with an employer pension plan, though your employment or plan membership ended, you still remain eligible to receive those pension funds. Thanks to provincial pension legislation, these funds are ‘locked-in’ in what is referred to as a Locked in Retirement Account (LIRA) and would be unavailable to you in cash until retirement age (as specified in applicable pension legislation).
Keep in mind that you can’t make withdrawals from your LIRA account; instead, monies must be transferred from the LIRA to a LIF account on the maturity date of the plan in order for you to make a withdrawal. Once the transfer is complete, you may begin to draw income by the end of the calendar year in which you turn 71. Like RRIFs, LIF payments constitute income and will be taxed at your then applicable marginal tax rate.
Good to remember that a LIF follows the RRIF minimum withdrawal rules but is also subject to annual withdrawals amounts. The maximum withdrawal amount per year is designed to ensure that an adequate amount of money remains in the LIF to last you until you reach the age of 89. If you withdraw the maximum payment each year (wow, you sure are having fun in your retirement!), there is very little left in funds by the time you turn 89. However, when you turn 90, you may withdraw any remaining funds in the LIF plan (as would remain if the minimum payment were to be drawn each year).
It’s important to prepare for retirement because given the choice between a fun-filled retirement versus the stress of the unknown, the choice is clear. Being prepared and knowing the ins and outs of RRIF and LIF withdrawals can put your mind at ease, help you with your retirement preparations and make your retirement easy breezy.