What is a RRIF?
What is a LIF?
What are the minimum and maximum yearly payments?
What are some ways to increase flexibility in withdrawing funds from RRIFs and LIFs?

On May 8, 2019, Kimberley Garston, Portfolio Manager at Logan Wealth Management, hosted a webinar covering the fundamentals of RRIFs and LIFs. This presentation was entitled: Everything You Need to Know about RRIFs and LIFs. 

What is a RRIF?

RRIF stands for Registered Retirement Income Fund. It is essentially an RSP that has been converted to a new account out of which you must take a minimum amount each year. This may be done at any time, but it must be done at the latest during the year you turn 71. It involves withdrawing everything from your RSPs and spousal RSPs and putting it all into a RRIF or spousal RRIF. This is done tax-free. During the year you turn 72 you must begin to withdraw from the RRIF yearly, in an amount specified by The Canada Revenue Agency (CRA).

What is a LIF?

LIF stands for Life Income Fund. It is a type of RRIF made up of funds that have been moved over from a pension plan from your employer that was either from a defined contribution plan, or a defined benefit plan. These funds would have been in a locked-in RSP or a Locked-In Retirement Account (LIRA). Like an RSP, you must convert these into a LIF during the year you turn 71, at the latest, and you must start to withdraw a minimum specified amount yearly during the year you turn 72.

There are more restrictions on what can be withdrawn from a LIF, as stipulated by the pension fund’s original federal or provincial legislation. One such restriction is that usually payments from a LIF cannot start before the age of 55 (while payments from a RRIF may start at any time).

What are the MINIMUM payments that have to be withdrawn each year from RRIFs and LIFs?

Each year, the government prescribes the minimum amount that must be withdrawn from RRIFs and LIFs, based on a percentage of the December 31st value of the account for the preceding year.

For persons under the age of 71, the calculation is 1 divided by (90 minus your age). A spouse can use the age of a younger spouse to calculate the percentage. This is advantageous for the older spouse if the younger spouse is younger than 71, since it lowers the minimum amount that must be withdrawn, thereby leaving more funds sheltered from tax for a longer period of time. Furthermore, an older spouse may continue to use a younger spouse’s percentage, even if they are predeceased by the younger spouse.

Let’s look at an example of a hypothetical couple, Paul and Sally, in Figure 1

Looking at Figure 2, if we use 5.4% as the CRA-stipulated percentage of the value of the account that must be withdrawn for persons turning 72 that year, Sally will have to withdraw that amount from her RRIF and Spousal RRIF. If we use the formula of 1 divided by (90 minus your age) for Paul, we can see that he will be required to withdraw funds at a rate of 4% from his RRIF and LIF.

But, if Sally uses Paul’s age to calculate her minimum payment percentage, this would move her from 5.4% to 4%. She would then only be required to withdraw $12,000 from her RRIF, and $6,000 from her Spousal RRIF, allowing her to keep an extra $4,200 and $2,100 in them respectively.

What are the MAXIMUM amounts that can be withdrawn each year from RRIFs and LIFs?
There is no maximum amount that can be withdrawn from RRIFs. This allows for increased flexibility, and we will look at this in more detail in Part 2 of this Webinar blog.

There is a maximum amount that can be withdrawn from LIFs. This ensures the longevity of funds, so your pension income lasts long into your retirement. The amount is a percentage of the value of the fund. It is based on current interest rates and your age, so it varies yearly.

What is the best way to have maximum flexibility in terms of planning?

If you are drawing funds before you are 72, you should always draw from your locked-in funds first, since these have the least flexible withdrawal terms. If you require more funds than the minimum payment, take the maximum payment from the LIF before digging into other sources of registered funds. If you require more funds, consider having the older spouse use their own age for the calculation instead of the younger spouse’s age. The greater the percentage of your assets that are in a locked-in plan, the more important planning ahead to increase your flexibility is.

What to expect in Part 2 of this webinar blog
In this first part of the presentation, we’ve explained what RRIFs and LIFs are. We’ve looked at the rules around minimum and maximum yearly payments and have illustrated this through an example. Finally, we addressed some ways to increase flexibility with respect to the amount you may withdraw from RRIFs and LIFs. In the second part of the webinar we will look at some provisions for getting around the maximum on LIFs, tax implications, Spousal RRIFs and attribution rules, income splitting, and finally, pension credits.

Disclaimer: Please note that the information presented here is intended as general information only. It reflects the thoughts and opinions of Logan Wealth Management and should not be construed as investment advice. Please consult your adviser to determine whether this information is applicable to your personal situation.