Establishing the right retirement income fund is incredibly important if you want to prevent any issues and challenges in the future. That’s why focusing on getting a Life Income Fund (LIF) can be a great idea, because it helps you protect your future and ensure you have money when you retire. With that in mind, the Life Income Fund has its own nuances. In this blog post we’ll explore everything you need to know about Life Income Funds.
What is the Life Income Fund?
In Canada, a Life Income Fund (LIF) is a type of registered retirement income fund (RRIF) that you can use to hold “locked-in” pension funds that will eventually be used for retirement income payments.
After reaching retirement age, you may convert your pension into a LIF and start receiving income from it. The funds in your LIF can only be used as retirement income. However, you may control how your money is invested in your LIF by selecting one of the following options for your investment strategy:
- Mutual funds
- Insurance GICs
- Segregated fund contracts
- Various alternatives that are in line with your risk tolerance and overall financial strategy
One thing to consider when it comes to LIFs is that you are not allowed to withdraw your funds all at once because the government regulates the amounts that can be withdrawn from Life Income Funds in the Income Tax Act’s stipulations. You will set an annual minimum and maximum withdrawal limit for your retirement depending on your age. The Income Tax Act states how much or how little you can withdraw from your LIFs and other RRIFs. The min & max increase as you get older.
Important LIF rules to take into consideration
- There are rules for when you can purchase a LIF and start receiving payments. Generally, you can start to withdraw from a LIF after age 55.
- There is a deadline that you have to start receiving payments, which is no later than December 31st of the year you turn 72.
- You always need to abide to the minimum and maximum withdrawal rules.
- Once you withdraw funds from your Life Income Fund, it is taxable income.
- You need the consent of your spouse before setting up your LIF because of how it might impact future death benefits.
- Only a limited number of investment types are eligible for inclusion in a LIF.
What are the pros and cons of having a Life Income Fund?
The main benefit is that all your contributions to the LIF are tax-deferred, which is incredibly helpful because it allows you to make the most of the ability to postpone paying taxes. The tax deferral you received from your LIRA is maintained in the LIF since income is only taxed when it is withdrawn.
Not only that, but if you are an LIF owner, you can choose how to invest, although there are some rules regarding LIF investments you need to consider. A life annuity may be purchased using the funds in your LIF (this is a popular option), though you may have to do this at a specific age if your province’s pension laws mandate it, i.e. after age 55.
A big advantage to LIFs is that LIF funds can be creditor protected.
There are a few downsides too. As we mentioned earlier, there is a minimal age requirement you must abide to if you want to start your Life Income Fund or receive payments. Also, there are investment limitations and maximum withdrawal limits.
Is a Life Income Fund right for you?
The Life Income Fund is a great pension income fund option that can help you protect your future and ensure you have enough retirement income.
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 book a virtual Zoom meeting.