Generally, several government-regulated accounts and registered plans in Canada assist individuals in preparing for retirement. Some, such as registered retirement savings plans, or RRSPs, are a good idea for all working Canadians. In this article, we focus on one of the interesting plans in Canada named “The Life Income Fund (LIF)”.
List of Contents
What Exactly Is Life Income Fund (LIF)?
First of all, a life income fund (LIF) is a kind of registered retirement income fund (RRIF) used to retain locked-in pension funds and other assets for future release as retirement income in Canada. In most Canadian provinces, LIF assets must be invested in an annuity. In a few provinces, LIF withdrawals can begin at any age so long as the funds are utilized for retirement income. Additionally, pension funds may be retained in many situations, but they are inaccessible to a departing employee. Thus, these assets are also referred to as locked-in assets. They may be handled in other investment vehicles, but conversion to a life income fund may be required when the owner is prepared to withdraw.
Nevertheless, anybody cannot take a lump payment from a life income fund. Owners must utilize the money in a manner that ensures lifetime retirement income. The Income Tax Act stipulates the minimum and maximum withdrawal amounts for RRIFs and LIF each year. Moreover, the RRIF provisions of the Income Tax Act consider fund balances and an annuity component. Once an investor receives LIF distributions, they must monitor the minimum and maximum withdrawal amounts. These amounts are declared in the yearly Income Tax Act, which has RRIF-specific provisions. The maximum RRIF/LIF withdrawal is determined by the greater of two formulae, which are expressed as a percentage of the total investments.
Management of Life Income Fund
Numerous organizations in Canada provide life income products to supplement retirement benefits for investors. The organizations offering life income funds are listed below, along with some information about their products.
Canadian Imperial Bank of Commerce
The Canadian Imperial Bank of Commerce provides a LIF savings account with daily interest. It facilitates retirement income disbursements. It also allows account holders to receive daily interest on their holdings.
Canada Life
It permits the conversion of assets in a registered pension plan, a locked-in registered retirement savings plan, or a locked-in retirement account. It also facilitates withdrawals of payments for retirement income.
Sun Life Financial
It provides a variety of LIF investment choices, including insurance-guaranteed investment contracts, mutual funds, and segregated fund contracts.
Rules of Life Income Fund (LIF)
Some basic rules for a LIF are as follows:
- Only specific sorts of investments are eligible for a LIF.
- Before establishing a LIF, you must acquire your spouse’s approval, as withdrawals might affect future death payments.
- You must begin receiving compensation the year after your 71st birthday.
- You must be at least the age of early retirement or the date of normal retirement to receive LIF payments.
- To acquire a LIF, you must be at least the early retirement age prescribed by pension law.
- You cannot consider your spouse’s age to set minimum LIF payments.
- Withdrawals are taxable at your marginal tax rate as income.
- LIF complies with RRIF minimum withdrawal regulations.
Benefits and Drawbacks of Life Income Fund (LIF)
Benefits
- Contributions can grow tax-deferred until the year after your 71st birthday.
- LIF assets are shielded from creditors and cannot be confiscated to satisfy debts.
- LIF holders are free to select their investments (as long as the investments qualify).
- Contributions to a LIF, like other registered goods, grow tax-deferred.
Drawbacks
- A LIF account can only hold qualifying investments.
- Maximum withdrawal limitations hinder you from getting additional funds when you need them.
- A minimum retirement age is required before receiving LIF compensation.
- Before starting a LIF, a minimum age (early retirement age) is required.
Conclusion
In Canada, a LIF is one form of registered retirement income fund (RRIF). In retirement, locked-in pension money and other assets can be withdrawn from a LIF account. Nonetheless, you must remember that you cannot withdraw a lump sum from your life income fund. The account is intended to supplement your retirement income for your life.