Everything You Need To Know About RRIFs and LIFs PART 2 OF 2

What are some provisions for getting around the maximum on LIFs?
What are the tax implications for RRIFs and LIFs?
What about Spousal RRIFs, attribution rules and income splitting?
Are there pension credits for RRIFs?

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 are some provisions for getting around the maximum on LIFs?

Some provinces, such as Alberta and Ontario, and federal legislation allow you a one-time option to unlock 50% of your LIRA when you are converting it to a LIF. It must be done within 60 days of opening and transferring the funds to a LIF.

For example, let’s say someone had $400,000 in an RRSP and $150,000 in a LIRA. When they convert these funds to a RRIF and LIF, they could take 50% of the funds in the LIRA ($75,000) and put it into the RRIF (or RRSP if applicable). This would bring their RRIF/RRSP to $475,000 and leave $75,000 in the LIF. This would be advantageous if they wanted to be able to draw on more funds because there is no maximum amount that may be withdrawn from a RRIF/RRSP, while there is a maximum that may be withdrawn from a LIF.

There are a few other privileges that allow people to get around the LIF maximum, but they apply only in narrow circumstances. These include:

  • LIF has a small balance
  • You are experiencing real financial hardship
  • You have a life expectancy of less than two years, as evidenced in a note from a doctor
  • You have been a non-resident of Canada for the past two years

What taxes apply to income from RRIFs and LIFs?

  1. Tax will be withheld at source, i.e. by the institution where the fund is held, before the income payment is put into the account according to the following chart:

2. Total tax is the amount of tax due based on your income level, i.e. the tax you pay at the end of April at your marginal tax rate. This may be greater or less than the amount withheld at the time of the withdrawal.

Spousal RRIFs and attribution rules

Attribution occurs when withdrawals are taxed in the hands of the contributor to plan or fund, not in the hands of the annuitant. Attribution rules apply to spousal RRIFs during the year a contribution is made, and for the following two calendar years.

This is more easily illustrated if we refer back to the example of Paul and Sally from the previous blog. Recall their situation:

Any amount that Sally withdraws in excess of the minimum amount allowable will be attributed to Paul (and therefore taxed in his hands) during the year he contributes to her spousal RRSP, and for the next two years. After that, the full amount will be taxable in Sally’s hands, as shown in Figure 2.

Income Splitting

Once you have reached the age of 65, up to 50% of RRIF and LIF income can be split between spouses. So, to maximize flexibility you might want to consider putting more savings into the older spouse’s name since that person will reach 65 sooner and be eligible to split their income sooner. Income splitting does not apply to RRSPs.

Pension Credits

Once you reach age 65 withdrawals from a RRIF can qualify for a pension credit. The credit is $2,000 at the lowest marginal tax rate. Although it is a benefit, there may be times when someone may not want to take advantage of this tax credit, such as when they are in the top marginal tax bracket. For example, an Ontario resident in the top marginal tax bracket will pay 53.5% tax on any additional income received. Offsetting this with a tax credit of 20%, still leaves 33.5% tax paid on the income. Although it is often advised that individuals should ensure they take advantage of the pension tax credit, we believe this advice should be income dependent.

Conclusions

You may be able to plan around the maximum withdrawal amount for LIFs. There are ways to maximize the value of your savings and increase your flexibility by properly planning and structuring your retirement income with respect to withholding tax, total tax, spousal RRIFs, income splitting and pension credits.

Start planning early! And if you aren’t certain what to do, get good advice.

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.