Are you approaching retirement age? If so, then it’s critical to understand the similarities and differences between LIF vs RRIF accounts.
In 2022, 32% more Canadians retired than the previous year, according to a recent CTV News report. This means that the Canadian workforce is retiring at an increasingly fast rate. To make the most of your retirement, you should know the basic rules, similarities, and differences between these two retirement accounts.
Below, I’ll compare LIF accounts and RRIF accounts in the following categories:
- Who can open the account
- Source of the funds
- When you can begin making withdrawals
- Minimum and maximum withdrawal amount
- Converting to annuity
- Tax rates
- Estate planning
Let’s take a look, shall we?
A Registered Retirement Investment Fund (RRIF) is a retirement fund designed to support retirees through their golden years. Canadians who contribute to a Registered Retirement Savings Plan (RRSP) must convert their RRSPs into RRIFs by the end of the year that they turn 71.
Once the RRSP is converted to an RRIF, no further contributions can be made, and the focus shifts to managing investments and making withdrawals.
Like RRSPs, an RRIF can be used to hold cash as well as a variety of investment products, such as:
- Mutual funds
- Guaranteed Investment Contracts (GICs)
- Government bonds
The main difference between an RRIF and an RRSP is that RRIFs have a minimum annual withdrawal requirement, which is represented as a percentage of the fund and varies based on the account holder’s age. Funds in an RRIF can also be withdrawn as a lump sum without additional tax penalties.
Withdrawals from your RRIF are taxed as standard income since your contributions to your RRSP were tax-deferred.
- You can withdraw as much as you need (no maximums)
- Your funds continue to grow tax-deferred
- You can choose to convert your RRIF into an annuity
- RRIFs can hold a diverse range of investments
- RRIF withdrawals are taxed as income based on the withdrawal amount
- You must convert your RRSP to an RRIF by December 31st of the year you turn 71
- You cannot contribute additional money to an RRIF after its converted from an RRSP
A Life Income Fund (LIF) is a retirement fund designed to provide a steady income stream for retirees who have accumulated pension funds in a Locked-In Retirement Account (LIRA) or a locked-in RRSP.
Essentially, a LIF is a type of RRIF designed to hold funds from a LIRA or locked-in RRSP, as opposed to a traditional RRSP. LIFs can be used to hold various investment products, such as:
- Mutual funds
- Stocks and ETFs
- Government bonds
LIFs can be self-managed or managed by a financial institution of your choice.
Like RRIFs, LIFs have a minimum withdrawal limit set by the CRA. The minimum withdrawal limit is a percentage of the fund based on the account holder’s age. Unlike an RRIF, though, LIFs also have a maximum withdrawal limit, preventing the account holder from withdrawing their LIF as a lump sum.
- Funds within a LIF can grow tax-deferred for the life of the account
- LIFs can hold a variety of investment options
- LIFs can be self-managed
- LIFs have minimum and maximum withdrawal limits
- Some LIFs must be converted to an annuity by a certain age
- No further contributions can be made to a LIF once it’s converted from a LIRA or locked-in RRSP
LIF vs RRIF: Breaking Down The Differences
As you can see, LIFs and RRIFs share a lot of similarities. They’re both registered with the CRA, can hold multiple investments, can be self-managed, and can’t be contributed to after they’re converted from RRSPs or locked-in pension funds.
However, there are also some considerable differences between the two types of accounts, which I’ll outline below.
LIF vs RRIF: Who Can Open The Account
One of the main similarities between LIFs and RRIFs is that the account holder must convert their previous pension or retirement savings plan into a LIF or RRIF by December 31st of the year they turn 71. After this period, no further contributions can be made to the fund.
There is no minimum age to open an RRIF. Technically, you could open an RRIF at 40. Once you transfer your RRSP funds into an RRIF, though, you can’t make any further contributions. Because of this, most people take advantage and try to contribute to their RRSP for as long as possible before the government requires them to convert it into an RRIF.
By contrast, an individual must reach the minimum early retirement age of their pension plan before they’re allowed to convert it into a LIF and begin withdrawing from the account.
In this area, I’d say that traditional RRIF accounts offer more flexibility for the account holder.
RRIF vs LIF: Where The Funds Come From
The primary difference between an RRIF and a LIF is where the funds come from.
An RRIF can be opened by anybody with an RRSP. RRSPs are personal retirement savings accounts that individuals can contribute to throughout their working years. Today, they’re the most common type of pension plan, as they’re relatively simple for employers to work with compared to locked-in pension plans.
RRSP holders must convert their RRSP to an RRIF by the end of the year they turn 71. The RRIF then generates a flexible income stream during retirement, with minimum withdrawal requirements based on the account holder’s age.
LIFs, on the other hand, can only be opened by those who were previously enrolled in a pension plan, such as:
- Locked-In Retirement Account (LIRA)
- Locked-In RRSP
These pension plans aren’t as flexible as traditional RRSPs since the individual’s employer manages them. Often the funds within a LIRA or locked-in RRSP are leftover from when the account holder left their previous employer and rolled their pension funds into a LIRA or locked-in RRSP.
Employer-sponsored pension plans aren’t as common today as they were in the past. Today, employees are more likely to switch jobs than in the past, which can complicate pensions. Today, individual and group RRSPs are the most common pension plans.
In short, LIFs come from locked-in pension funds (usually from former employers), while RRIFs come from the individual’s RRSP (which could be individual or from an employer).
LIF vs RRIF: When You Can Begin Withdrawing
Once you convert your RRSP into an RRIF, you must begin making regular annual withdrawals. The same applies to LIFs. In this way, they’re mostly the same.
The only difference is that an RRIF can be opened at an earlier date compared to a LIF, which means that those who retire early could begin making withdrawals at a younger age.
- Related Reading: 12 Ways To Retire Early In Canada
RRIF vs LIF: Minimum And Maximum Withdrawal Limits
Both RRIFs and LIFs have a minimum withdrawal limit, which is calculated by multiplying the fair market value (FMV) of the fund 1 divided by the amount of 90 minus your current age. The formula for calculating your RRIF minimum is:
- FMV x (1/(90 – your age))
The minimum withdrawal for a 71-year-old is 5.28% of the fund’s market value. This gradually increases each year until the individual reaches age 95 or older, at which point they must begin making minimum withdrawals of 20% of the fund’s market value.
The main difference here is that RRIFs have no maximum withdrawal limit. Conversely, LIFs do have maximum withdrawal limits based on the amount of money in your fund and your current age.
Because of this, RRIFs offer far more flexibility, as you can withdraw your retirement fund as a single lump sum.
LIF vs RRIF: Converting Funds To Annuity
Once you convert your RRSP into an RRIF, you’ll have the option to convert it into an annuity and start receiving steady monthly payments for the remainder of your life. You can convert an RRIF into an annuity at any time or choose not to.
Depending on the province or territory you live in, you may be required to convert a LIF into an annuity by age 80 or 85.
Again, RRIFs offer more flexibility to the account holder by allowing them to choose if and when they convert the retirement fund into an annuity.
Conclusion – An LIF Is A Type Of RRIF With More Restrictions
A LIF is a type of RRIF designed to hold locked-in pension funds from former employers. LIFs share a lot of similarities with RRIFs, but they do entail more restrictions, such as maximum withdrawal limits, annuity conversion, and when you’re allowed to open the fund.
If given a choice, opting for an RRIF will offer you more freedom and flexibility during your retirement.
Do you want to achieve financial independence and retire early? If so, I highly recommend reading my article on the famous FIRE formula and how it can help you reach your financial goals earlier in life.