I suspect to retire in physical, mental and financial well-being are goals most of us have. For us this means some financial planning today ensures we have a chance of ending up where we want to be. For today’s post I’d like to share some LIF withdrawal strategies I’ve been toying with.
LIRA and LIF 101
- If you left a company with a pension before retirement (like I did in my late-20s) you likely had a choice to move the money into a Locked-In Retirement Account (LIRA). These accounts are designed to help you continue to accumulate wealth that originated from your former pension plan; the account by design is to lock-in money and for the most part you can’t touch this money although some financial hardship exceptions apply.
- LIRAs do not allow for lump sum withdrawals so eventually if you want income from your LIRA, you will have to either transfer the money in to a Life Income Fund (LIF) or a Life Annuity. I’m tempted to use the LIF route myself. More on that in a bit.
- You usually need to be age 55 or older to get your money out of your LIRA and start your LIF although that rule has some wiggle room. These are the rules in Ontario. Based on Ontario rules: “Owners making investment decisions should be mindful that the Canada Revenue Agency requires that by age 71, all RRSPs including LIRAs, must be used to purchase a life annuity, LIF or LRIF.”
- This makes a LIF a specific type of income fund. Consider LIF like a Registered Retirement Income Fund (RRIF) – you have the flexibility of deferring taxes on the income and on the growth of those assets so long as the investments stay inside the LIF account. You are then taxed on withdrawals.
- LIFs are available in many provinces but not all of them.
- Once the LIF is established there are minimum (and maximum) withdrawal amounts from the account. Based on the federal budget announced this year those numbers look like this:
I’m thinking we’ll take advantage of the small LIRA we have this way:
- Convert LIRA to LIF at age 55 (still close to 15 years away).
- Invest in a few blue-chip stocks producing income inside the LIF.
- Take the income earned inside LIF and withdraw it at account minimums starting at age 55 (2.86%).
- Drain the LIF account by using account minimum withdrawals over time.
I’m not sure how much we’ll have in our small LIRA when we retire but I’m optimistic we’ll have enough to cover LIF account minimum withdrawals for about 5-10 years before touching the capital. This certainly won’t be a windfall in retirement but using the minimum withdrawal criteria should help us avoid excess taxation.
Do you own a LIRA or a LIF? If so, how do you manage it?