Life Income Fund (LIF) – How It Works?

Life Income Fund (LIF) – How It Works?

One of the most important things on Canadian citizens’ minds is planning for retirement. Fortunately, Canadians can choose between several account types to help them pay for retirement. A Life Income Fund (LIF) can help you smartly save for retirement. 

The team at Group Enroll is here to answer the question, “what is a LIF?” We will talk about the benefits of this kind of retirement fund and how you can take the most advantage of it.

What Is a Life Income Fund (LIF)?

A Life Income Fund or LIF is a specific kind of Registered Retirement Income Fund that allows a recipient to receive regular payments during retirement. A LIF takes pension funds from a Locked-In Retirement Account (LIRA) and disburses a minimum to the recipient every month.  

One of the key features is that you cannot withdraw a lump sum from a LIF. You must take regular payments subject to minimum and maximum withdrawal limits. The point of a LIF is to provide regular payments to retired persons, similar to the regular income from a job.

Each year, the government applies a formula to your previous year’s income to determine maximum and minimum withdrawal limits.

Who Can Create a LIF?

To create a LIF, you must have a LIRA that you contribute to your pension. When you reach retirement age, you can convert the funds in a LIRA into disbursements for a LIF. 

Provincial rules determine at what age you can convert your LIRA into a LIF and start collecting payments. You must also convert your LIRA into LIF payments by December 31st the year you turn 71.

LIFs and Taxes

Like a Registered Retirement Savings Plan, LIRA account gains are tax-exempt until you convert them into a LIF and start withdrawing money. When you accept that money, you will have to pay income taxes on those funds.

If you pass away before you use all the money in your LIF, your financial institution can pay the remaining funds to a spouse or allow them to roll over those funds tax-free into a Registered Retirement Savings Plan account.

What Are the Benefits of a LIF?

Now that you know what a LIF is, let’s go over its benefits.

Tax Advantages

Similar to other types of retirement funds in Canada, you don’t have to pay taxes while the money in the LIF account grows from your investments. You only have to pay taxes when you withdraw and use the funds during retirement.

Longer Growth

Unlike many other retirement accounts, you can push back accessing your LIF after retirement until you are 71 years old. Postponing withdrawals gives your investment more time to grow and accrue value.

Consistent Income

Unlike an individual pension plan, a LIF gives you a consistent source of income every month. The government puts a minimum and maximum withdrawal amount depending on the previous year’s taxable income. The consistent nature of LIF disbursements makes it easier to budget during retirement.

Investment Freedom

One of the best features of a LIF is the amount of investment freedom you have. Allowable assets in a LIF include:

  • Cash
  • Mutual funds
  • ETFs
  • Private stock
  • Corporate bonds
  • Government bonds

Opening a LIF gives you a flexible way to pick investments and plan for your retirement.

What Are the Downsides of a LIF?

Like any retirement product, LIFs have a few downsides. 

  • You must be a minimum age before you can start accepting payments from a LIF. However, you can delay disbursement to give your investments more time to grow until you are 71. 
  • LIFs have maximum withdrawal limits per payment period, so you won’t be able to withdraw more money if you need it during that period. 
  • LIFs offer more retirement flexibility than many other retirement accounts, but there are still limitations on what kinds of investments your account can hold. 

Life Income Fund FAQs

Below are some of the most pressing questions about how LIFs work.

You can start making withdrawals from your LIF as soon as you reach the province-defined retirement age. You can postpone taking withdrawals until the end of the year when you turn 71.

Financial institutions determine annual withdrawal limits using the same formula they use for registered retirement income fund payments. You can calculate your minimum withdrawal limit with the formula:

1 ÷ (90−current age)

For example, if you are currently 65, the minimum payment for your LIF would be 1 ÷ (90 − 65) = 4%. The minimum required withdrawal is 4% of your total LIF fund. After the age of 71, percentages follow a government-defined disbursement schedule.

Yes. You can transfer LIF funds into another LIF, pension plan, annuity, or pooled registered pension plan account.

Yes, all the funds in your LIF are creditor protected, meaning creditors cannot seize your retirement funds as collateral or to pay off any debt.

You do not have to turn your LIF into a LIRA. You can use the money to purchase an annuity, for example. If you are going to have a LIF, you must transfer from your LIRA before the end of the year when you turn 71.

Opening a LIF is a good idea for anyone who wants to simplify receiving income during retirement. If you anticipate high living costs when you retire, you may want to consider another investment vehicle that does not have maximum withdrawal limits.

LIRA vs RRSP: What Should You Consider for Retirement?

Learn the difference between LIRA and RRSP accounts to better plan out your retirement options.

Compare Life Income Fund Providers Today!

Now that you know the answer to “what is a LIF?”, you can take the next step. Find and compare group insurance policies and retirement funds with Group Enroll. Fill out our quote form to get started and receive competitive rates on retirement funds, group health insurance, and more from Canada’s top providers. You can also email our team at [email protected] or visit our office at 10 Great Gulf Drive, Unit 5, Vaughan, ON, L4K 0K7.

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