Saving your money inside an RRSP keeps it growing tax-free – but you can’t keep it there forever. Eventually you want to start to spend that money during retirement. You will be required to do this by the end of the year you turn 71.
Many people choose to move their money out of an RRSP to a RRIF, when they’re ready to start spending it.
How a RRIF can fit into your financial plan:
For people who want to take money out of their RRSP as regular income, RRIFs are an excellent choice.
• You control your investments – The money can be invested in many ways, so it keeps growing and working for you.
• You control your income – There is a minimum withdrawal requirement, but in addition to that, you can take as much as you want, when you want. You need to be careful because extra withdrawals can erode your capital and future income.
• You maximize tax deferral – Since income is taxed only when it’s taken out of the plan, the tax deferral you enjoyed with your RRSP continues with your RRIF.
• It can be passed to your spouse tax-free – RRIF assets can be passed directly to your spouse, on your death, without being taxed.
• You can convert to more secure guaranteed income at any point in time.
LIF & LRIF
If you leave a job where you had a pension plan, you usually have a choice between leaving the pension money in the pension plan or transferring it to a locked-in retirement account (LIRA) or locked-in RRSP, where it can be invested according to your directions until it’s time to retire. Typically, the money is locked-in and cannot be withdrawn until you start retirement.
After a minimum age (set by your province) you can start to receive income from this pension money by converting it into a LIF or LRIF. (Depending on your province, you may have a choice between the two types of accounts. As well, there may be different rules affecting these accounts).
The LIF or LRIF pays you an income. There’s a maximum you can withdraw each year, which is intended to ensure that your money will last long enough to help support you in your retirement.
• You can hold many types of investments in LIFs and LRIFs, such as GICs, mutual funds, or segregated funds. You decide where to invest and can perform transactions within the plan.
• You can name a beneficiary to receive your money after you die.
• There’s a minimum income you’re required to take out of the plan every year and a maximum you’re allowed to take from your plan. The maximums for LIFs are slightly different than for LRIFs.
• You can use money remaining money in a LIF to purchase a secure guaranteed income in a life annuity. Depending on the pension rules in your province, you may be required to do this at a certain age.
• LIFs are available across the country. LRIFs are available in some provinces.
How LIF and LRIF can fit into a financial plan
People who have locked-in pension money invested in a LIRA or a locked-in RSP and want to start to receive an income from it must roll the money into one of:
1. a LIF, or
2. an LRIF, or
3. buy a life annuity.
The money received as income from any of these plans should be considered when planning income.
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