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- GUIDE TO MUTUAL FUNDS
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What Does Life Income Fund Mean?
A life income fund (LIF) is a type of registered retirement income fund (RRIF) in Canada that can be used to hold locked-in retirement accounts (LIRAs) and other assets for retirement income.
A LIF is meant to live up to its name, and funds aren't to be withdrawn in a lump sum. Owners must use it to support retirement income. Regular updates to Canada's Income Tax Act set the minimum and maximum withdrawal amounts for RRIFs, which include LIFs, though these limits and other aspects of a LIF depend on the province in which the pension plan was set up. The annual maximums and minimums may account for your balances in other funds and annuities.
Withdrawals from a LIF are taxed as income in the year they are received. In most provinces, you must convert your LIRA to a LIF by the end of the year when you turn 71.
KEY TAKEAWAYS
- Life income funds are a type of retirement income vehicle used in Canada.
- They are typically created from locked-in retirement accounts (LIRAs) or locked-in registered retirement savings plans (RRSPs), which come from transferring funds out of a workplace pension plan.
- You must be at least of early retirement age set by law to buy a LIF, and you must be at least of early retirement age or at the normal retirement age to begin receiving LIF payments, and you must begin receiving payments in the year ending after you turn 71.
- Contributions to a LIF grow tax-deferred, owners can choose their own investments (as long as the investments qualify), and funds within a LIF are creditor-protected.
Understanding Life Income Fund (LIF)
LIFs are offered by Canadian financial institutions. They are plans for managing payments from locked-in pension funds and other assets.
In many cases, pension assets aren't accessible when an employee leaves a firm. These assets, usually called locked-in, can be managed through other plans. However, you might need to move the funds into a LIF once you're ready to begin withdrawals.
Most provinces in Canada require that LIF assets be invested in a life annuity. In many provinces, LIF withdrawals can begin at 50 if the income is used for retirement income.
Once you begin taking LIF payouts, you'll have to ensure you mean the minimum and maximum for each year. Your financial institution for the LIF will have this information, which is updated regularly through Canada's Income Tax Act and has sections that regulate all RRIFs. The financial institution from which the LIF is issued must give you annual statements for the LIF.
Based on the annual statement, you must specify at the beginning of each fiscal year the amount of income you would like to withdraw. This must be within a defined range to ensure the account holds enough funds to provide lifetime income for the LIF owner.
Qualified investments include cash, mutual funds, exchange-traded funds, securities listed on a regulated exchange, corporate bonds, and government bonds.
Life Income Fund (LIF) Rules
Here are some general rules about LIFs:
- A LIF has the same minimum withdrawal rules as RRIFs.
- Withdrawals are considered income and are taxed at your marginal tax rate.
- In some provinces, you can use your spouse's age to determine the minimum account withdrawals.
- You must be at least of early retirement age (specified in pension legislation) to buy a LIF.
- You must be at least of early retirement age or normal retirement date to begin receiving LIF payments.
- You must begin receiving payments at the end of the year after you turn 71.
- If you have a spouse, you must get their consent before setting up a LIF as withdrawals could impact future death benefits
- Only certain types of investments qualify in a LIF.
- LIF rules, including withdrawal limits and age requirements, can vary by province. For example, in Newfoundland and Labrador, LIFs must be converted to a life annuity by age 80.
- Upon death, the balance of a LIF is paid to the spouse, or if the spouse renounces it or is absent, to other heirs. This is consistent across provinces.