Differences Between LIFs and RRIFs in Canada

When it comes to retirement savings, there are a few different investment accounts. Many folks end up with a Life Income Fund (LIF) and/or a Registered Retirement Income Fund (RRIF). Both plans have different features. First of all, what comes from what?

RRSP > RRIF (registered retirement income fund)

LIRA > LIF (locked-in fund or life income fund)

It can be difficult for investors to sort thru all this jargon. Let’s explore the differences between a LIF and RRIF. To help you out, we will talk about some of the primary differences between both plans.

What are LIFs?

LIFs are tax sheltered investment accounts that hold pension money. You likely need to be over age 55 to access, depending on province. The LIF results from a LIRA (locked-in retirement account) which in turn holds money from:

a. your defined benefit pension plan commuted value OR

b. the proceeds of the deposits that your employer made into a defined contribution pension plan. Wow, that’s a mouthful.

LIRA & LIF money are tax sheltered plans. You pay no tax until you withdraw.

In simple words, LIF is a retirement plan that can be used to hold locked-in pension funds to be used later for retirement income. Unlike your RRSP or RRIF, this cannot be withdrawn as a lump sum. BUT (isn’t there always a but) you can split the split the LIRA in half.

50% goes into an RRSP or RRIF (no lock in). The other 50% must stay locked-in in a LIF and you must start withdrawals the next year.

Consult a table for minimum withdrawal amounts, applicable to both RRIF & LIF. The difference is that the LIF also has a ceiling on withdrawal amounts. As an example, the minimum at age 72 is about 5%, the maximum is about 8%.

Don’t get caught by internet trolls who charge for this knowledge and transaction. This unlocking is regulatory. Anyone can set this up for you, even your bank.

What are RRIFs?

RRIFs are registered retirement income funds, also tax sheltered growth, that can be used to create a tax-deferred savings plan. In a RRIF, an individual transfers their existing RRSP funds to a new account (it’s just a name change) and starts receiving income beginning the following year. Any withdrawals are taxed at your current income tax rate, the same as salary.

In other words, RRIFs allow individuals to transfer their tax-deferred savings into an account that will provide them with income. It is one of the most common forms of retirement income that can be used by investors for drawing regular retirement income. We have many clients who take a regular monthly income. The investment drops income directly into your bank. We call this a drip or SWP (systematic withdrawal plan).

What Are the Benefits Of LIFs?

There are many benefits of LIFs, some of the most important benefits are mentioned below:

1. Contributions will grow tax-deferred: The funds in a LIF grow tax-deferred which means you won’t have to pay taxes on the amount contributed or the gains it earns. You pay income tax when you withdraw.
2. Your funds may be creditor protected: Under Canadian law, your registered funds are creditor protected which means they cannot be seized by your creditors. Further, if you invest in insurance company funds, funds go directly to your spouse, your kids or grands, not your creditors.
3. Withdrawals are flexible: LIFs cannot be taken as a lump sum. But, as said above, you can “unlock” half (50%). Or you can take regular withdrawals from it over time if you want to keep the income steady. Don’t forget, there is a maximum withdrawal amounf.
4. You can choose your investments: One of the best benefits of LIFs that you can choose your investments. As long as the investments qualify for the plan, you are good to go!
5. Your funds will grow until you become 71: The LIF funds will continue to grow tax-deferred even after you begin to withdraw.

Disadvantages Of LIFs

Now let’s take a look at some of the points that you might miss out while using a LIF.

1. Withdrawal limits: One of the biggest disadvantages of a LIF is that you can only withdraw up to a maximum amount. Consult a chart; the banks all put out LIF min/max withdrawal charts. At age 72, you must take about 5% but not more than 8%.
2. Minimum age limit: The minimum age limit to open a LIF is 55 years old. Anyone under the age of 55 will not be allowed to open an account. So, if you have LIRA money, you cannot touch until you turn 55, other than financial or health distress.
3. Account must be closed by age 71: You are required by law to convert your LIRA account the year in which you turn 71 into a LIF. That means that you must start withdrawals. Hey, the government wants their tax money!

What Are the Benefits Of RRIFs?

There are many benefits of an RRIF, some of which we have listed below:

1. Your funds will grow tax-free: Your investments will grow tax-free in a RRIF which is one of the most common benefits that most Canadians look for when investing. So, you convert your RRSP to a RRIF. You start withdrawals. Nonetheless, your money is still invested and will continue to grow.
2. Flexibility: The best part about RRIFs is that you can start receiving money monthly, quarterly, and yearly. You can also choose when you want to start withdrawing your money, age 72 latest. You can withdraw all the money at once, but then, there’s no more for retirement.
3. You can name a beneficiary: RRIFs are flexible in the sense that you can name a beneficiary for your investments in case you die. Note that investments funds with insurance companies allow named beneficiaries on non registered money also.
4. You can split 50% of your RRIF income with your spouse: One of the biggest advantages of RRIFs is that you can split 50% of your RRIF income with your spouse. It was announced in 2007 and it still applies to this day, beyond age 65.

Disadvantages Of RRIFs

Just like LIFs, there are also some disadvantages to using an RRIF as well. Some of these might be points that you haven’t thought about before.

1. You must make withdrawals: The biggest disadvantage of an RRIF is that you must take withdrawals from the account annually/ quarterly or monthly. You must withdraw the mandated minimum or more, whether you need the money or not.
2. You can outlive your RRIF income: Since you must withdraw an annual amount from your RRIF, there’s a possibility that you may outlive your retirement income. At the age of 71, or at any age, you can transfer your money to a life annuity. This will pay you as long as  you live. I have a client who is 98 years old. She sold her house 14 years ago. She bought an annuity that pays her 10% of the purchase price, no tax. She is still receiving a monthly income. The insurance company is losing their shirt on her. Go cry. 🙂
3. Requires monitoring: RRIFs must be monitored carefully to ensure that you do not run out of money.

Key Differences Between LIFs vs RRIFs

Now that you have a better understanding of both types of plans, let’s go over some of the key differences between LIFs and RRIFs.

1. Flexibility: RRIFs are more flexible than LIFs. With RRIFs, you can receive funds monthly, quarterly, and annually with no maximum limit to withdrawal. The LIF has a maximum withdrawal percentage.
2. Minimum age to open: To start a LIF plan, you must be 55 years old or older. Whereas a RRIF, you can open an account at any age.
3. Minimum withdrawal: You must withdraw a certain percentage from your RRIFs. At age 64, one must withdraw 4% of their total investments. At the age 71, it increases to 5.28%, and at the age of 85, it’s 8.51%. Same mandatory minimum withdrawals for LIFs but don’t forget the maximum withdrawal limit.
4. Withdrawal limits: With RRIFs, you can withdraw more than the minimum amount. This is not allowed in LIFs. All income from either plan is fully taxable, just like your salary was.
5. Named beneficiary: With RRIFs or LIFs, you can name a beneficiary who will receive the full value of your investments after you pass away. If this is a spousal roll over, there is no tax on transfer BUT any withdrawal by the survivor is fully taxable. We just completed a transfer for a deceased. His spouse will receive the RRIF, no tax on transfer, and the LIF, no tax on transfer. Plus, the LIF loses its “locked-in restriction”. She receives the LIF as a non locked-in RRIF.
6. Splitting income with spouse: Both can be split subject to age limitations.

Conclusion

As you can see, there are many similarities and differences between LIFs and RRIFs. When it comes to your retirement planning, don’t spend tomorrow’s income today. You’re going to get old. Speak with a financial advisor or tax expert.

At Pension Solutions Canada, we specialize in assisting people in preparing for retirement. Allow us to evaluate and review your retirement income sources and assist you with retirement planning. Call us at 1-888-554-6661, or click here to schedule a free 15-minute virtual Zoom meeting with Bruce Youngblud, CFP at Pension Solutions Canada.