RRIFs, LIFs & Annuities
You have three choices to convert your Registered Retirement Savings Plan (RRSP) into retirement income. These must be determined and in place by the end of the year in which you turn 69 years old. You can cash in your RRSPs, and face a potentially hefty tax bill. You can convert your RRSP into a Registered Retirement Income Fund (RRIF). Or, you can buy an annuity such as a Life Income Fund (LIF) or a locked-in Retirement Income Fund (LRIF).
Retirement Income Funds (RRIFs)
RRSP holders often roll over their RRSPs into a Registered Retirement Income Fund (RRIF) to fund their retirement. Think of a RRIF as an extension of your RRSP. Your plan stays intact, while your investments grow tax-free. The only difference - you must withdraw a certain amount from it each year. The value of your RRIF and how long your income will last will depend on the investments you choose, how those investments perform, as well as how much income you plan to withdraw each year. RRIF payouts are considered a part of the beneficiary's normal income and are taxed as such in the year that the payouts are received.
Once you have commenced an RRIF, however, you cannot make any further contributions from income. You must make withdrawals, subject to prescribed minimums, every year for the rest of your life or until all the funds in your RRIF are withdrawn.
Advantages of a RRIF:
- You retain personal control of your investment.
- You can change the amount of your income.
- You can make lump sum withdrawals at any time.
Disadvantages:
- Lump sum withdrawals or poor performance may diminish your capital more.
Life Income Funds (LIFs)
A LIF is a type of RRIF that let's you decide what you want to invest in, and how much you want to withdraw each year. Your investments grow tax-free. However, the big difference between a RRIF and a LIF is that the government requires you to purchase a life annuity before you turn 80 years old. You can purchase a LIF if your funds were in a Registered Pension Plan (RPP), Locked-In RRSP, Locked-In Retirement Account (LIRA) or in another LIF.
Locked-in Retirement Income Funds (LRIFs)
An LRIF and a LIF are similar; however, an LRIF permits lifetime control over investment decisions and does not require the mandatory purchase of a Life Annuity by age 80. An LRIF as well as a LIF have both annual minimum and maximum withdrawal limits. They are calculated slightly differently. Minimum limits are identical between RRIFs, prescribed RRIFs, LIFs and LRIFs however the maximum withdrawal limit for an LRIF is a function of age, previous year-end balance and performance history. You might want to get professional advice before making a final decision on LRIFs.
If you want a guaranteed income, an annuity may be right for you. Payments are fixed; however, you cannot increase payments or withdraw larger amounts. Annuities are ideal to cover fixed costs or if you are concerned about outliving your income.
There are different types of annuities:
- Guaranteed Life annuities pay you a guaranteed income for as long as you live
- Fixed Term annuities pay you a set income for a guaranteed period of time (usually to age 90)
- Joint-Life-and-Last Survivor annuities pay a guaranteed income while you and your spouse are alive, and continue paying that income to the surviving spouse if one of you die.
Advantages of a Life Annuity:
- You cannot outlive your income.
- Annuities usually pay higher incomes then RRIF's.
- You are not required to make any investment decisions.
- Your future income is fully guaranteed.
Disadvantages:
- Most annuities can not be cashed or altered after income has commenced.
* There are government limits as to how little and how much you can withdraw from your RRIF or LIF each year. Some of these investment products are not available in all provinces.
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