Life income funds provide stability
Many people have problems with the ins and outs of LIFs and LRIFs.
Whether it’s better to use a life income fund (LIF) or a life retirement income fund (LRIF) to withdraw the maximum possible amount each year is the main question.
Both plans have annual ceilings, but the formulas for the maximum are different and vary from province to province. LRIFs are not available in all provinces.
Couple maximizes payout
CARP member Joan Coxhead of Belwood, Ontario, concluded the predictability of the LIF formula made it the better bet. Coxhead writes:
“For my husband and myself, using a LIF to age 80 to receive the maximum payout was the better choice. After that, the funds would be rolled over into a LRIF, rather than to an annuity. My calculations were based on earnings up to eight per cent. I have since been told that, for earnings over eight per cent, the scales tilt in favour of a LRIF [from the beginning].”
Because the money is presumably invested in low-risk securities, my comment is that it is not prudent to assume a LIF or LRIF will generate an average annual return of greater than eight per cent.
Coxhead raises another point: Should money be taken out of these registered plans at an accelerated rate, when possible?
Generally, I prefer to leave such money in place for as long as you can to defer taxes and maximize the effect of tax-sheltered compounding.
However, she suggests there are times when accelerated withdrawals may make sense. Here is her reasoning:
- LIFs and LRIFs are designed for preservation of capital.
At age 80, these plans may still hold close to the same amount they started with. For the most part, only earnings on capital will have been paid out. This may not meet the goals of those who would like to have access to as much of the money as possible to spend while they are still young and healthy enough to enjoy it.
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- If they choose not to immediately spend all that is withdrawn from the locked-in plans, the excess can be reinvested in tax-efficient, non-registered accounts.
- A taxpayer who is not yet collecting Old Age Security may need the higher income now in order to have enough taxable income to take advantage of all non-refundable tax credits.
- At age 72, there is a large increase in minimum RRIF withdrawals.
This could push a person into a higher tax bracket. By making larger withdrawals from all registered accounts sooner, it may be possible to avoid this.
Take best advantage
She also notes that a retiring employee must choose a company-paid pension (annuity) and/or take the full amount of the pension as a locked-in fund.
The pension generally ends with the death of the former employee or, if joint, with the death of both husband and wife, and the balance is lost to the estate.
A LIF or LRIF can be rolled over to an RRSP or RRIF of the spouse when the holder dies.
At the second death, the balance becomes part of the estate-or, by designating a beneficiary, will bypass the estate and probate fees will be avoided. This does not mean taxes will be avoided, however.
Comparison with RRIF
Coxhead has done her homework well and makes several useful points.
If you want to draw higher amounts from a LIF or an LRIF, convert your locked-in RRSP as soon as possible, since both income plans are subject to maximum annual withdrawals, unlike a RRIF, which has no such limit.
But before you make such a decision, do the calculations to make sure it is to your advantage or consult a professional adviser.