Getting Ready to Convert Your RRSP or LIRA?
Over the course of your working career, you’ll likely spend decades building wealth for retirement. That’s why registered vehicles like the registered retirement savings plan (RRSP) and locked-in retirement account (LIRA) remain so popular. They offer a tax-advantaged way to put aside and grow money for your retirement years.
But what happens to your RRSP or LIRA when it’s time to retire? If you’re approaching retirement or know somebody who is, keep reading to find out how these accounts ultimately help create cash flow for retirement.
Understanding RRSPs and LIRAs
An RRSP is designed to produce retirement income that supplements other sources, such as government and company pension plans. You may contribute to an RRSP based on a percentage of your annual earned income, up to a pre-determined limit. This allowable limit is reduced if you have a registered pension plan (RPP) at your workplace—refer to each year’s income tax return statement for your RRSP contribution limit.
If you leave your place of employment, you can transfer your RPP to a locked-in account like a LIRA. You may also take the funds in cash if the pension assets aren’t locked in. However, that money is fully taxable, so most people don’t choose this option unless they need the cash immediately. The latest you may convert a LIRA or RRSP to an income-producing plan is December 31 of the year when you turn 71.
While there are other types of locked-in accounts like prescribed RRIFs and LIFs, and LRSPs and RLIFs, which share similar characteristics, we just refer to RRSPs, RRIFs, LIRAs and LIFs in this article for simplicity.
Time for conversion
So, retirement is on the horizon and it’s time to start lining up your income sources. Let’s look at the registered retirement income fund (RRIF) and life income fund (LIF).
RRIFs and LIFs are similar to RRSPs and LIRAs since they’re also registered accounts that can hold investments in a range of securities (e.g., stocks, bonds, mutual funds, exchange-traded funds, GICs), plus the funds are tax-sheltered as long as they’re held in the plan. However, instead of building wealth, the purpose of RRIFs and LIFs is to draw on your accumulated wealth to provide income in retirement.
There are also notable differences between RRIFs and LIFs. For instance, you may convert an RRSP to a RRIF at any age, whereas the earliest you may convert a LIRA to a LIF is age 55. Furthermore, while RRIFs and LIFs are both subject to minimum annual withdrawals (more about that in the next section), only the LIF has maximum withdrawal limits each year. For both plans, any money withdrawn is deemed regular income for tax purposes, so report these amounts on your tax returns.
Rules for making withdrawals
Legislation regarding RRIF and LIF withdrawals may appear confusing because of the formulas involved. Luckily, Canadian financial institutions publish tables that list the minimum amount to withdraw each year and (in the case of LIFs) maximum amounts as well. For your reference, below is a withdrawal table for 2023.
2023 - Registered Plan Minimums and Maximums
| Age at Dec. 31 of previous year (2022) | RRIF/LRIF/ pRRIF/LIF/ RLIF Minimum | LIF/RLIF Maximum | LIF Maximum | |
|---|---|---|---|---|
| Federal (Include Territories) | Manitoba1, Quebec, Nova Scotia | Alberta2, British Columbia2, Ontario2, Newfoundland and Labrador2, New Brunswick, Saskatchewan3 | ||
| 55 | 2.86% | 4.98% | 6.40% | 6.51% |
| 56 | 2.94% | 5.04% | 6.50% | 6.57% |
| 57 | 3.03% | 5.10% | 6.50% | 6.63% |
| 58 | 3.13% | 5.16% | 6.60% | 6.70% |
| 59 | 3.23% | 5.23% | 6.70% | 6.77% |
| 60 | 3.33% | 5.30% | 6.70% | 6.85% |
| 61 | 3.45% | 5.38% | 6.80% | 6.94% |
| 62 | 3.57% | 5.47% | 6.90% | 7.04% |
| 63 | 3.70% | 5.57% | 7.00% | 7.14% |
| 64 | 3.85% | 5.67% | 7.10% | 7.26% |
| 65 | 4.00% | 5.79% | 7.20% | 7.38% |
| 66 | 4.17% | 5.92% | 7.30% | 7.52% |
| 67 | 4.35% | 6.06% | 7.40% | 7.67% |
| 68 | 4.55% | 6.22% | 7.60% | 7.83% |
| 69 | 4.76% | 6.40% | 7.70% | 8.02% |
| 70 | 5.00% | 6.61% | 7.90% | 8.22% |
| 71 | 5.38% | 6.83% | 8.10% | 8.45% |
| 72 | 5.40% | 7.10% | 8.30% | 8.71% |
| 73 | 5.53% | 7.39% | 8.50% | 9.00% |
| 74 | 5.67% | 7.74% | 8.80% | 9.34% |
| 75 | 5.82% | 8.14% | 9.10% | 9.71% |
| 76 | 5.98% | 8.60% | 9.40% | 10.15% |
| 77 | 6.17% | 9.14% | 9.80% | 10.66% |
| 78 | 6.36% | 9.76% | 10.30% | 11.25% |
| 79 | 6.58% | 10.50% | 10.80% | 11.96%3 |
| 80 | 6.82% | 11.39% | 11.50% | 12.82% |
| 81 | 7.08% | 12.48% | 12.10% | 13.87% |
| 82 | 7.38% | 13.84% | 12.90% | 15.19% |
| 83 | 7.71% | 15.59% | 13.80% | 16.90% |
| 84 | 8.08% | 17.93% | 14.80% | 19.19% |
| 85 | 8.51% | 21.21% | 16.00% | 22.40% |
| 86 | 8.99% | 26.13% | 17.30% | 27.23% |
| 87 | 9.55% | 34.33% | 18.90% | 35.29% |
| 88 | 10.21% | 50.74% | 20.00% | 51.46% |
| 89 | 10.99% | 100.00% | 20.00% | 100.00% |
| 90 | 11.92% | 100.00% | 20.00% | 100.00% |
| 91 | 13.06% | 100.00% | 20.00% | 100.00% |
| 92 | 14.49% | 100.00% | 20.00% | 100.00% |
| 93 | 16.34% | 100.00% | 20.00% | 100.00% |
| 94 | 18.79% | 100.00% | 20.00% | 100.00% |
| 95 & above | 20.00% | 100.00% | 20.00% | 100.00% |
| Sources: Federal and provincial pension legislations, regulations and policies, 2023. Notes:
2 The maximum LIF payment for Alberta, British Columbia, Newfoundland and Labrador, and Ontario is the greater of the percentage in the above columns or the previous year’s investment return. 3 Saskatchewan allows transfers from a LIRA to a prescribed RRIF. Prescribed RRIFs do not have maximum withdrawal limits. Saskatchewan LIFs have not been offered since April 2003. Any pre-existing LIF mut be converted to a life annuity before December 31 of the year in which you turn 80. Since the LIF will cease to exist at this date, subsequent maximum payment rates do not apply. | ||||
We’ll look at an example to provide clarity on how withdrawals work. Let’s assume you were 64 at the end of 2022. Find that line on the table above and you’ll see your minimum 2023 withdrawal is 3.85% of the assets held in your RRIF or LIF, which is pretty straightforward.
For LIFs, the rules regarding maximum withdrawal amounts are a little more complicated. That’s because you first need to identify whether your LIF is federally or provincially regulated (and inform your financial institution when transferring funds from a LIRA to a new LIF account), since maximum withdrawal amounts differ by type.
In 2023, the maximum a 64-year-old may withdraw from a federally regulated LIF is 5.67%. The maximum from a provincially regulated LIF depends on your province of residence. So, if you’re 64 and live in Nova Scotia, for example, the maximum withdrawal is 7.10%, while it’s 7.26% if you live in, say, Ontario.
How do you know whether your LIF is federally or provincially legislated? A quick check online should provide the answer. If your plan is federally regulated, you can find it on the Office of the Superintendent of Financial Institutions website. If your plan is provincially regulated, the following table of RPP regulators1 can help you locate regulators in your home province.
Saving enough money for retirement is crucial for enjoying post-employment life to the fullest. As tax-sheltered plans, RRSPs and LIRAs allow you to build wealth efficiently, and then access those funds in retirement when you convert the plans into a RRIF and/or LIF.
CI Direct Investing’s team of professional financial advisers will work with you to make sense of your options for transferring pension benefits and locked-in retirement savings. We’ll guide you toward choices that make sense, given your stage of life and financial goals.
Book a call to speak to one of our advisers today.
1 Source: https://www.taxtips.ca/pensions/rpp/lif-and-lrif-minimum-and-maximum-withdrawals.htm