A Life Income Fund, more usually abbreviated to LIF, is a registered account intended only to hold your locked-in pension assets until you reach retirement age. If you move money from your pension into a Locked-in Retirement Account, also known as a LIRA, you will ultimately need a Life Insurance Fund.

In Canada, one of the several kinds of registered retirement income funds, or RRIFs, is called a life income fund (LIF). A life income fund, or LIF, is an account that allows for the distribution of locked-in pension funds and other assets after retirement. You cannot make contributions to a LIF Income; rather, it is designed only to store and withdraw money previously held in a LIRA.

Qualification for LIF

Whether or not you should look into a LIF hinges not so much on whether or not you qualify for the program as it does on how much money you need. Only those individuals who first transferred their frozen pension money into a LIRA will ultimately be required to convert that account into a LIF. If you have a LIRA, as soon as you reach the retirement age required by the province in which your pension is stored, you can transfer it into a LIF instead of keeping it in the LIRA. It would help if you transferred LIRAs into LIFs no later than December 31 of the year you turn 71.

The Procedure for Taking Money Out Of A LIF

Withdrawals from LIFs are restricted in a variety of different ways. Because there are limits on the amount that may be taken out of a LIF each year, it is impossible to withdraw a single sum from one. You are obligated to take a certain minimum amount out of the money in your LIF account every year. Your home province will also determine the minimum and maximum LIF withdrawal percentages that you are eligible to take out of your account. These percentages will fluctuate every year since the Tax Act mandates that they do so.

There are a few exceptional scenarios where you may be permitted to make an early withdrawal from your LIF account. These scenarios are quite particular. Becoming a non-resident of Canada or being diagnosed with a terminal disease are two examples of these circumstances.

Rules for LIFs and Their Potential Tax Ramifications

Like LIRAs, LIFs are tax-sheltered. This implies that you will only be required to pay taxes when you withdraw the money. At the time of year when taxes are due, the financial institution where you opened the LIF needs to provide you with the appropriate tax documents. For instance, several provinces allow residents to unlock their LIF benefits by paying a one-time, flat amount. Only anyone above a particular age may take advantage of this opportunity. In this scenario, the money from the LIF may either be taken as cash, in which case it is subject to taxation, or it can be moved to either an RRSP or an RRIF (not taxed). Additionally, in addition to the yearly withdrawals, several provinces let residents take out an extra amount each year, referred to as temporary income.

If you die away while having money in your LIF, the balance will be given to your spouse, or if they are not alive, it will be distributed to your heirs. When this happens, the recipient may be able to transfer the money into their RRSP or RRIF tax-free in certain provinces, but in others, they are required to keep the money locked away and subsequently move it to a locked-in RRSP or LIF.

LIF Benefits and Drawbacks

The decision to invest one's retirement savings in a LIF comes with inherent trade-offs, as one would expect.

Pros

• Accounts that are exempt from taxes are called LIFs. You won't have to pay taxes on the money until you remove it, which is normally done after retirement.
• You can defer receiving LIF income until age 71, giving it more opportunity to accumulate free of taxation.
• It is simpler to prepare your retirement strategy with a LIF since its withdrawal form, which is yearly rather than a lump sum, is used.
• You are free to choose your investments while using LIFs.

Cons

• LIFs are subject to stringent regulations regarding the types of investments held inside the account and how the account can be utilized.
• It is impossible to begin contributing to a LIF until you have reached the age at which you are eligible for early retirement in the province where the first pension plan was established.

LIF Alternatives

Those who are residents of Canada and hold a LIRA have the additional option of converting it into a life annuity. A financial institution handles the management of a life annuity, but you handle the management of a LIF.