RRSP to RRIF, and LIRA to LIF: How it all gets done - MoneySense (2024)

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In a previous column, I wrote about the necessity of winding up registered retirement savings plans (RRSPs) by the end of the year you turn 71. It’s a topic that becomes increasingly compelling as your deadline approaches. This follow-up column looks at two related topics: the similar deadline of LIRA-to-LIF (locked-in retirement account, life income fund) conversions and the alternative of full or partial annuitization.

What are LIRAs, LIFs? And how do they compare to RRSPs?

LIRAs are analogous to RRSPs, albeit with different rules. They usually originate from an employer pension, to which you once contributed in a former job. To protect you from yourself, a LIRA doesn’t allow you to extract funds from it while in your younger years, unless you qualify for a few needs-based exceptions. LIFs are in effect the instrument LIRAs are obliged to become, which also happens to be at the end of your 71st year. They can be converted into annuities or can continue to hold the same investments that were held in the LIRA, just as RRSPs can become RRIFs and/or be annuitized.

How to convert a LIRA to an annuity

Over the years, as a financial journalist, I have written about annuitization, including in my Retired Money column. But I had not actually taken steps to do it myself. However, with the help of Rona Birenbaum, founder of Caring for Clients, my wife, Ruth, and I decided to take a first step by starting with Ruth’s LIRA.

Birenbaum confirms that everyone’s individual registered account, whether RRSP or LIRA, must be converted to a RRIF by the end of the calendar year in which the account’s owner turns 71. This is not affected by having a younger spouse: that only affects the annual minimum withdrawal calculus.

In my case, having turned 71 early this April, I have until the end of this year to convert my RRSP to a RRIF. The first required minimum RRIF withdrawal must occur in 2025. And by the end of 2025, I must have withdrawn the annual minimum amount. Ruth, being a year and a few months younger than I am, must convert by the end of 2025 and start her withdrawals in 2026.

“You can both do it sooner, but you can’t do it any later than that,” says Birenbaum. You can choose RRIF payment frequencies: usually monthly, quarterly, semi-annually or once a year—you just have to specify which date. I imagine we’ll go monthly.

Currently, our retirement accounts are held at the discount brokerage unit of a Canadian bank, although we use a second discount broker for our non-registered holdings.

While the LIRA will be the basis of an annuity provided by an insurer selected by Birenbaum, most of our RRSPs will likely become RRIFs. That’ll probably happen by November this year for my RRSPs, and a year later for Ruth. Birenbaum assures us we don’t need to switch to the bank’s full-service advisors in order to make this transition.

Our hope is that we will keep largely the same investments we hold now and administer them ourselves, with an eye to maintaining enough cash to meet our monthly withdrawal targets.

How to use a self-directed RRIF (and plan for taxes)

The new investment vehicle bears a name that will sound familiar to those with self-directed RRSPs—a self-directed RRIF. At our bank, it was a simple matter of checking the RRSP online and finding the link to convert it to a self-directed RRIF. Once there, I ticked the boxes to choose when I want the money, the withdrawal frequency and (optionally) a tax withholding rate. If your spouse is younger than you are, you can also specify that your withdrawals will be based on your spouse’s age.

Birenbaum says retirees often fail to specify withholding tax because there is no minimum withholding tax required on the minimum withdrawal. I imagine Ruth and I will ask to have 30% tax taken out at the time of each withdrawal, which is what we do with existing pension income. It’s on the high side to make up for the fact that we also have taxable investment income (mostly dividends) that is not taxed at source.

As an example, say you have a $100,000 RRIF and you take out $5,500 next year. If that’s all you take, you don’t have to have withholding tax taken off. But if you have other income sources (as most Canadian retirees do), you know there will be some tax liability come tax filing time. So, it makes sense to voluntarily withhold taxes so you don’t have a big tax surprise down the road.

Birenbaum suggests doing the math and setting aside funds in a high-interest account, then paying the Canada Revenue Agency (CRA) when taxes are due.

If you don’t do this, the CRA may, at some point, ask that you make quarterly tax installments. “I find the majority of retirees like having that withholding tax held at source so they don’t have to deal with installments and owing the CRA,” says Birenbaum. You can, of course, have more than 30% withheld.

How to change from a LIRA to an annuity

With a LIRA, you need to get the account liquid before the money is sent to the insurance company to annuitize. This means keeping tabs on the maturity dates of guaranteed investment certificates (GICs) or other fixed income.

Ideally, you anticipated this years ago, and everything becomes cashable the year you start your LIF. But in the real world, this doesn’t always happen. In our case, we aimed to annuitize a round number (like $50,000 or $100,000) and put the remainder in a RRIF until it’s ready to add to the annuity.

It’s the same with stocks or equity exchange-traded funds (ETFs). Ideally, you don’t sell at a significant loss. In the case of our LIRA, this can be deferred to the end of 2025, with initial payments starting in 2026. But we will probably start sooner just to get used to the process and see the tax consequences.

The paperwork is minimal. We provided a recent LIRA statement, then had an online meeting with one of Birenbaum’s insurance-licensed advisors to go through the application, then signed a transfer form to move the cash to the insurance company for a deferred annuity.

The transfer takes a few weeks, with the actual annuity rate determined when the insurance company receives the money. Registered transfers are recalculated at the point of purchase. There is the T2033 form, which is an RRSP-to-RRIF transfer form that moves the money from the bank to the insurance company.

How buying an annuity works

Semi-retired actuary and author Fred Vettese says he has endorsed retirees buying a life annuity ever since the first edition of his book Retirement Income for Life came out back in 2018.

“If you buy one, it should be a joint-and-survivor type, meaning it pays out a benefit to the survivor for life,” he says.

The cost of an annuity is considerably lower now than it was in 2018 or in the early years of COVID, Vettese says. That’s because interest rates are now higher. However, “[I’m] not quite as gung-ho on annuities now as I used to be,” he says. Vettese views the threat of high inflation as more real now than he did in 2018 or 2020. “Inflation is the annuitant’s worst enemy since the annuity payments are fixed.”

Even so, Vettese stands by his past suggestions that retirees can allocate 20% of their retirement savings (in an RRSP or a LIRA) to the purchase of an annuity, if they are really averse to investment risk and want to reduce longevity risk.If you have both an RRSP and a LIRA/LIF, Vettese suggests using the money in the LIF first to buy an annuity, because LIF withdrawal rules are more restrictive than RRIF rules.

Withdrawing money from a LIRA/LIF

Matthew Ardrey, senior financial planner with Toronto-based TriDelta Private Wealth, agrees with Vettese. “Though not recommended, you can draw funds out of your RRSP anytime. For a LIRA, though, you must be at least 55 years old before doing so. LIRAs are funded by pensions, either the commuted value of a defined benefit (DB) pension or the market value of a defined contribution (DC) pension. Thus, the government policy places extra restrictions to ensure these accounts are withdrawn in a more balanced fashion.”

However, there are ways to get around some of these restrictions. Ardrey lists three:

1. Financial hardship
   When a person has low income, there’s a sliding scale of how much money can be withdrawn. The maximum is 50% of the current year’s maximum pensionable earnings (YMPE) for $0 income, down to $0 withdrawal if income is 75% of YMPE.
2. Debt repayment
   This can include things like mortgage arrears or even first and last months’ rent.
3. Medical expenses
   This accounts for high medical costs in relation to income. The maximum amount is 50% of YMPE.

There are a few other instances when you can apply to have the entire balance of the LIRA/LIF withdrawn. This can be a cash withdrawal or a transfer to an RRSP/RRIF:

1. Shortened life expectancy
   Medical proof is required.
2. Non-residency status
   If you’ve ceased to be a Canadian resident for at least two years.
3. Low balance
   If the balance in the account is less than 20% of YMPE.

Like RRSPs converting to RRIFs, LIRAs must be converted to LIFs by the end of the year you turn 71. Similarly, you must start taking minimum payments in the year in which you turn 72. However, the maximum payment amount differs. Ardrey says the LIF has a ceiling, which a person cannot withdraw above in a given year. That can be a limiting factor in retirement planning.

A workaround is that federally legislated LIRAs and some provincial ones permit unlocking 50% of the LIRA’s value when converting it to a LIF. This must be done within 60 days of conversion.

“The unlocked 50% may be taken in cash—taxable, of course—or transferred to a RRSP/RRIF. This removes the maximum withdrawal restriction from 50% of the value of the plan,” Ardrey says.

To annuitize or not to annuitize

When deciding whether or not to annuitize a registered asset, Ardrey uses a side-by-side comparison to determine the “hurdle rate” a portfolio would need in order to produce the same income stream. The big wild card is longevity.

“The longer a person lives, the better the annuity option is—and vice versa,” says Ardrey. “If someone dies early and has not guaranteed the annuity or provided some survivor benefit, then that capital is gone. If it remained in a registered account, then it would have rolled over to the surviving spouse or been paid out to a beneficiary.”

Read more Retired Money columns:

• How to double your CPP income
• Retirement income for life
• Switching from RRSP to RRIF
• How to plan for retirement