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Turning over a new LIF

Andy Wong
Guest columnist
Monday, June 9, 2008

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Some of us own a locked-in registered retirement savings plan (RRSP) and wonder how and when we can unlock our money. You can't as long as it stays parked in the locked-in RRSP.

And that's the whole point - the locked-in plan prevents you from raiding your pension. You have to jump a hoop and convert your locked-in RRSP to a Life Income Fund (LIF) in order to get cash.

The good news is you don't have to retire to convert your locked-in plan to a LIF. You can covert at any time and start withdrawals from your LIF provided your locked-in plan was created in the NWT or Nunavut. An NWT or Nunavut locked-in plan is one where the locked-in RRSP was created from pension benefits earned while working in the NWT or Nunavut.

For example, if you are 48 years old (or any other age) and own an NWT or Nunavut locked-in RRSP, you could convert your locked-in plan to a LIF now. In fact, if you quit your job and transfer your pension to a locked-in RRSP today, you could convert the locked-in plan to a LIF tomorrow and start cash withdrawals on Wednesday (speaking hypothetically, since the paperwork moves slower than your cash needs).

Since you can start a LIF anytime, you have to wonder how much you can withdraw, i.e., are there restrictions? There are, although new federal rules have relaxed them considerably.

Once you own a LIF you must withdraw an annual pre-determined amount, within a minimum and maximum range. The reasons for the limits are obvious. The minimum required withdrawal prevents you from tax-sheltering your LIF funds forever whereas the maximum ceiling stops you from exhausting your LIF prematurely.

Generally, you can withdraw 3 per cent to 12 per cent of your funds annually depending on your age. The annual limits are about $4,000 and $7,000 if you're 65 years old and have a LIF balance of $100,000 at the beginning of the year.

New rules announced by the federal government last month also allow for generous one-time LIF withdrawals under certain circumstances.

If you are at least 55 years old with a LIF worth less than $22,450 you can wind up your LIF and transfer those funds to a regular RRSP or a registered retirement income fund (RRIF) if you are age 70 or older. This small balance withdrawal greatly increases your flexibility because there are no withdrawal restrictions for your RRSP (except for the tax bite).

If you face financial hardship, at any age, you can withdraw up to $22,450 a year from your LIF. Financial hardship means low-income or high disability or medical related costs but there isn't a hard-and-fast test to determine financial hardship. The financial institution that holds your LIF should be able to advise you accordingly

The last unlocking rule is the most beneficial. If you are at least 55 years old, you can transfer up to 50 per cent of your LIF funds into a regular RRSP or RRIF. For example, if you are, say, 60 years old and have a LIF worth $400,000, you could transfer $200,000 into a regular RRSP. This increases your withdrawal options significantly. You can cash out any amount from your RRSP at anytime whereas LIF withdrawals are tightly governed by minimum and maximum withdrawals rules.

Andy Wong is a tax consultant at MacKay LLP, Chartered Accountants in Yellowknife. He can be reached at andrew-wong@yel.mackayllp.ca.