Converting Your LIRA to Income
If you leave an employer prior to retirement, you may be entitled to pension credits from contributions made to a registered company pension plan while you were employed.
Rather than leave these funds under company management, many people choose to transfer their pension credits to a Locked-in Retirement Account (LIRA), sometimes also referred to as a Locked-in RRSP.
If you hold funds in a LIRA, there are several things you should know as you prepare for retirement:
Options
When converting a LIRA to retirement income, you may choose from three options:
- Life Income Fund (LIF)
- Locked-In Retirement Income Fund (LRIF) (in Alberta, Saskatchewan, Manitoba, Ontario and Newfoundland and Labrador only)
- life annuity (refer to our section on annuities for more info)
Choosing the Right Option
Which option is best for you? That depends on a variety of factors in your personal situation such as:
- your age when converting your LIRA
- need for regular retirement income
- need for payment flexibility
- concerns about inflation
- your ability and interest-level in managing your own investments
Similar to a RRIF (a Registered Retirement Income Fund purchased with the proceeds of an RRSP), LIFs and LRIFs are considered more flexible than annuities. They are often the vehicles of choice for those who wish to continue actively managing their financial affairs.
LIFs
A Life Income Fund, or LIF, allows you to convert LIRA funds into a stream of regular income payments that continues until the end of the year in which you turn 80.
Except for Quebec residents, remaining funds must be used to purchase a life annuity at age 80. Quebec residents may either keep their LIF for life or purchase an annuity.
In most provinces, you must be within ten years of the standard retirement age stipulated by the original pension plan - usually age 55 - to purchase a LIF.
Income Payment Amounts
A LIF allows you to withdraw an annual payment amount of your own choosing, subject to both minimum and maximum annual payment amounts that are calculated according to legislated formulas.
You must begin taking your income payments no later than the end of the year following the one in which the plan is opened. If, for instance, you purchase your LIF in 2001, you must take your first payment by the end of the year 2002.
Our Minimum Annual Income Calculator can help you determine your minimum LIF income payment, based on the value of your LIRA and your age at conversion.
To find out your maximum annual payment, contact your financial institution or accountant.
Income Tax
Income payments are taxable in the year they are received, with your LIF principal remaining sheltered from tax until it is withdrawn.
While withholding tax is only deducted on amounts that exceed your minimum income payment, you may choose to have additional taxes withheld if you prefer.
Please Take Note
With a few exceptions, LIFs are very similar in nature to RRIFs. If you are currently considering a LIF or would like information on designing your LIF strategy, you'll find it useful to review the RRIF portion of this site.
LRIFs
Converting your LIRA to a Locked-in Retirement Income Fund (LRIF) is an option only for those living in Alberta, Saskatchewan, Manitoba, Ontario and Newfoundland and Labrador.
Similar in every way to a Life Income Fund (LIF), both the minimum and maximum LRIF payment amounts are clearly defined.
The LRIF Advantage
LRIFs, however, offer additional flexibility in that they can be maintained throughout your entire lifetime - with no requirement to convert to a life annuity at age 80.
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