If your client is looking to retire soon, facing the prospect of retirement can be both exciting and stressful for them. Thank goodness you are here to help! Let’s have a look at the basics of retirement withdrawal products including RRIFs and LIFs, so you can help your client retire with ease.
Registered Retirement Income Funds (RRIFs) – what are they and how do they work?
Taxpayers may contribute to their RRSP up until the end of the year in which they turn 71 years old. By no later than this age, the accumulated funds must be converted into a RRIF, from which a minimum withdrawal must be made each year (the calculation of which is discussed below). RRIF withdrawals constitute income and will be taxed at your client’s then-applicable marginal tax rate (based on their province or residence and income). Your client can collect their annual RRIF withdrawal as monthly, quarterly or semi-annual payments or as a lump sum at any time, as long as the total amount taken equals the minimum withdrawal amount. Many people choose to take the withdrawal at the end of the year so the funds can grow tax-free as long as possible, but income requirements may dictate an alternative approach. There is no maximum withdrawal amount; however, any amount withdrawn in excess of the minimum is subject to withholding tax.
While there is no age limit on how long a RRIF can be maintained, RRIF payments are designed to continue for the remainder of your client’s life. The minimum withdrawal amount is calculated by multiplying the market value of their RRIF on January 1st by a prescribed rate based on their (or their spouse’s) age. Prescribed withdrawal rates change annually and can be found on the CRA website.
Your client must withdraw the first payment by the end of the calendar year following the year in which they set up their RRIF. For example, if your client set up the RRIF in 2020, they must begin withdrawing income in 2021. As with an RRSP, a RRIF must be collapsed upon death of the accountholder and its full value is included on the deceased’s terminal return and subject to tax. If however, the beneficiary of your client’s RRIF is their spouse or a financially dependant child, then the full value of the proceeds will be paid to the beneficiary on a tax deferred basis.
Life Income Funds (LIFs) – what are they and how do they work?
If your client previously worked for a company with an employer pension plan and their employment or plan membership ceased, they remain eligible to receive pension funds. Provincial pension legislation dictates that those funds must be ‘locked-in” to what is referred to as a Locked in Retirement Account (LIRA) and would be unavailable to your client in cash until retirement age (as specified in applicable pension legislation).
Your client would not be able to make any withdrawals directly from a LIRA account. Instead, the monies must be transferred from the LIRA to a LIF account. Once the transfer is complete, your client must begin to draw income by the end of the calendar year in which they turn 71. LIF payments constitute income and will be taxed at your client’s then applicable marginal tax rate.
A LIF follows the RRIF minimum withdrawal rules, but is also subject to maximum annual withdrawal amounts. The maximum withdrawal amount per year is designed to ensure that an adequate amount of money remains in the LIF to last until the holder – your client – reaches the age of 89. If the holder draws the maximum payment each year, there will be no funds remaining in the plan after the year the holder turns 89. In the year the holder turns 90, they may withdraw any remaining funds in the LIF plan (as would remain if the minimum payment were to be drawn each year).
The prospect of retirement can seem a little daunting, but with the right planning and a few simple products, it can be a time of pure joy. Hopefully, this overview of RRIF and LIFs can help you guide your client to a happy and seamless retirement.
For more information on retirement withdrawal products, including RRIFs and LIFs, contact your local PPI office.