life income funds
What does a life income fund mean?
A life income fund (LIF) is a type of registered retirement income fund offered to individuals in Canada that can be used to lock in pension funds, including other assets for a payout as retirement income. However, a life income fund cannot be withdrawn as a lump-sum amount. The owners of the fund must utilize the plan in such a manner that supports their retirement income throughout their life. The Income Tax Act annually specifies the minimum and maximum withdrawal amount for Life Income Funds (LIF).
All you need to know about Life Income Funds
Life Income Funds (LIF) are provided by several Canadian financial institutions. It is an investment vehicle for individuals who are looking to manage their payouts from pension funds that are locked in, as well as other assets. In most cases, the pension assets of an employee may not be accessible until they leave the firm. These assets are usually locked in, and when the owner decides to withdraw, they will need to convert it into a Life Income Fund (LIF). A specific government formula determines the pay-outs for Life Income Funds (LIF). In fact, it applies to all registered retirement income funds. Several provinces in Canada require that Life Income Funds be invested in a life annuity. As long as the income invested is used for retirement income, the withdrawals can begin at any age. Once the investor starts taking out Life Income Fund payouts, they must be aware of the minimum and maximum amounts that can be withdrawn. Do not worry, these amounts are disclosed in the annual Income Tax Act. The act also provides stipulations pertaining to all RRIFs. The financial institution that issues the LIF must present an annual statement to the owner of the Life Income Fund. Based on the annual statement, the owner of the fund will specify at the start of the year the amount they would like to withdraw. However, the range must be defined to ensure the account has enough funds to provide the LIF owner with lifetime income.
How a Life Income Fund (LIF) fits into one’s financial plan?
The owner has the freedom to choose their own investment portfolio
They can increase their tax deferrals
The remaining money present in the LIF can be used to purchase a guaranteed income in a life annuity
The money can be paid off to the beneficiary mentioned in the plan in the event of the demise of the owner.
Pros and Cons of a Life Income Fund (LIF)
Pros of Life Income Fund:
Like several other registered retirement products, the contributions that grow in a Life Income Fund (LIF) are tax-free.
The owners of the Life Income Fund (LIF) have the option to choose their own investment products, as long as the investment qualifies.
A significant pro – The funds in a LIF are creditor-protected and cannot be taken or seized by anyone to pay off any outstanding
Till the age of 71 of the owner the contributions will grow tax-free.
Cons of Life Income Fund:
To open a Life Income Fund (LIF) there is a minimum age requirement criteria.
A minimum age requirement for either early retirement or normal retirement before the owner can start receiving Life Income Fund (LIF) payments.
The option of maximum withdrawal limits prevents the owner from accessing more income when they need it the most.
Only investments that are qualified can be held in a Life Income Fund (LIF) account.
How do the payments of Life Income Funds work?
Once you have your pension funds in an LIF, you are entitled to start receiving payments. However, for the first year of your LIF, there is no minimum payment requirement, but there is a maximum annual withdrawal amount. As long as you are maintaining the minimum amount required in the LIF, it should not be a problem. The payments can be made monthly, quarterly, half-yearly, or a lump-sum amount annually.
At what age can you withdraw money from a LIF? And is it taxable?
The money from your LIF can be withdrawn at 55 years old. No withdrawals are permitted below the age of 55. Income earned in the LIF is taxable, and it must be added to your annual income. If the withdrawal is higher than the annual withdrawal limit, taxes are retained on the excess amount.