The Most Annoying Retirement Account in Canada! LIRA/LIF Rules Explained!

Added: 2026-05-05

[00:00:00]Welcome. In this video, we're going to be talking about the most annoying retirement account in Canada. It's restrictive. It's annoying. It has special rules which limit retirement planning options. If you have a defined benefit pension plan, if you have a defined contribution pension plan, or if you have a locked-in retirement account, a LIRA, then chances are you could or you will end up with this annoying account in retirement. So, what account are we talking about? Well, you may have guessed it already. We're talking about the life income fund, the LIF account.

[00:00:38]The life income fund, or the LIF account, is unique because not only does it have a minimum annual withdrawal, but it also has a maximum annual withdrawal.

[00:00:49]So, it has a minimum annual withdrawal, just like a RRIF account, a registered retirement income fund, but the life income fund, the LIF account, also has a maximum withdrawal each year. That maximum withdrawal can be extremely limiting in a retirement plan. It can be extremely restrictive. And if you're not careful, that maximum annual withdrawal can cause some serious issues within your retirement decumulation plan. Now, my name is Owen. I'm an advice-only financial planner, a CFP, and I'm the founder of advice.ca. In this video, we're going to be going over where a LIF comes from. So, where does that account originate from? Will you have one in retirement? How to prepare ahead. We're going to go over some of the LIF rules, so rules that you should be aware of if you're going to have this account in the future. I'm going to show you an example on the advice platform. I want to show you an example of just how restrictive and annoying this account can be. And then I'm going to show you some opportunities and tips. So, opportunities to reduce or eliminate the impact of those LIF withdrawal rules.

[00:01:54]And then I'm going to show you one horror story, one horror story of how things can go wrong if you're not aware of the restrictions on the LIF account.

[00:02:03]So, where does a LIF come from? Where does a life income fund come from? Well, typically the origination of a life income fund is originally from some sort of registered pension plan, either a defined benefit pension plan or a defined contribution pension plan. What ends up happening is when you leave your employer, you're forced to make a decision around these registered pension plans. If you have a defined benefit pension plan, then you have to decide sometimes if you want to take a commuted value. If you take that option, a bulk of that ends up going into a locked-in retirement account. If you have a defined contribution pension plan, then again, when you leave your employer, you're no longer participating in that plan. You have to decide what to do with the funds in the defined contribution pension plan. One of those options is to move it into a locked-in retirement account, a LIRA account. Now, that LIRA account, after you leave your employer, the only way to start withdrawals is to convert it into a life income fund. Now, that life income fund has that minimum withdrawal, but it also has a maximum withdrawal as well. Now, one of the questions could be, why does it have a maximum withdrawal? Well, my understanding here is that the government, because it came from a registered pension plan originally, the government is trying to make those funds last for the rest of retirement, and so they are trying to limit how much you can withdraw each year so that those funds last a little bit longer. So, they put a maximum cap on the withdrawals from a life income fund because they don't want you to take it all out in a few years. Now, that ends up being extremely restrictive when it comes to retirement planning. So, we need to think ahead if we have a life income fund, a LIRA, a defined contribution pension plan, or a defined benefit pension plan that you're planning to commute, we need to think ahead and how we're going to deal with those maximum withdrawals. There are some important rules when it comes to the life income fund, the LIF account, and these rules can catch some people off guard. They look at the life income fund and they think it's like a RRIF account, a registered retirement income fund, and they don't realize that there is both a minimum and a maximum withdrawal amount.

[00:04:19]So, that min-max constraint can be very limiting if you're not aware of it ahead of time. Now, the min-max withdrawal calculation is based on your age at the end of the previous year. So, that'll give us the withdrawal percentage, the minimum and the maximum. That withdrawal percentage goes up every year as you get older. And the min-max withdrawal amount is also based off the account balance at the end of the previous year. So, that gives us the dollar amount that you're able to withdraw at both the minimum and the maximum. Now, jurisdiction matters here. So, whether or not your LIF is federally regulated or provincially regulated will matter quite a bit. The rules are different by province or federally. So, depending on where that registered pension plan was originally from, you may not have a maximum withdrawal. Some provinces don't have a maximum withdrawal on their life income fund, in which case you've got more flexibility. But if you have a life income fund that is federally regulated or from a province that has a maximum withdrawal, then you need to be aware of that in retirement, and you need to plan ahead. You need to plan around those maximum withdrawal limits.

[00:05:35]Now, before we look at the opportunities and tips, I do want to show you this example in the advice platform. This is from a couple weeks ago. We did a case study with John and Mary. We were, in this case, trying to help them spend more in early retirement. Their target retirement spending was 100,000 a year, but we were able to identify some opportunities to help them spend 130,000 a year in early retirement. So, an extra 30,000 a year all the way up until age 75.

[00:06:03]Now, they can only do this if they have some good investment returns, average or better, or reasonable inflation rates.

[00:06:10]But that's quite a bit of extra discretionary spending that they can always reduce if they have some lower returns or higher inflation rates. Now, to do this, we were melting down the registered assets. So, we were getting all of the registered assets out of those accounts by about age 79, 80. So, it allowed us to keep the healthy amount in the TFSA accounts, still about a quarter million or more, um very liquid in those TFSA accounts.

[00:06:39]But to do that, we were we were withdrawing from the registered accounts, you know, sometimes 70, 80,000, 82,000 per year, targeting a specific tax level. So, we were doing some good tax planning throughout early retirement, um but we were withdrawing more from the registered accounts to do so. Now, watch how restrictive the life income fund is. So, I'm going to make a copy of this. And instead of having those assets in a registered an RRSP or RRIF, we're going to have them in a LIRA LIF account, a more restrictive account in retirement.

[00:07:14]To do that, I'm going to go down to advanced options, and we're just going to move this balance from the RRSP into the LIRA LIF account. That's all we're going to do. We're not changing the tax implications. They're both taxed the same. We're not changing the amounts at all.

[00:07:30]All we're changing is where that money sits, what type of account. Now, before I recalculate here, let's take a look.

[00:07:36]We've got after-tax estate value of 1.177 million, 340,000 lifetime tax. And in early retirement, we're withdrawing 80,000 or so a year from those registered accounts. Now, let's recalculate here.

[00:07:51]Now, what ends up happening? We have a lower estate value. We withdraw less in early retirement. The reason is at a younger age, those maximum withdrawal percentages are quite a bit lower. So, we're restricted here in how much we can take from that life income fund because John and Mary are a little bit younger, in their early Now, what's super annoying is that we have to backfill with the TFSA or non-registered account if we want to meet that target retirement spending.

[00:08:21]And at some point here, we're even running out of money in liquid assets.

[00:08:26]We've got lots of money in the registered accounts, but we can't get to it. We can't withdraw enough because we have those darn maximum withdrawal limits every year. This is the restriction. This is the annoying part about those life income funds. Now, it's okay in this case. It's just 1 year.

[00:08:42]They can always use a little bit of debt. They can maybe use a home equity line of credit. They're planning to spend less at 75 anyway. But what if you were planning to spend more until age 80? That might be even more restrictive.

[00:08:55]So, this is the annoying part about a life income fund is that you are restricted on how much you can withdraw every year. That limits your tax planning. That limits your cash flow planning in retirement. It limits, potentially, how much you can spend in retirement. A very annoying account when it comes to retirement planning. There are four specific opportunities and tips that I want to highlight for you when it comes to the LIF account. Now, let's go on the Government of Canada website here, and I'm going to highlight two of the better known options, and then I'm going to share with you two of the lesser known options. So, let's take a look at two of the better known options.

[00:09:34]Now, there are a bunch of options here, but they're a bit more edge case.

[00:09:37][clears throat] So, we've got financial hardship, that's one of them. We've got non-residency, that's another option.

[00:09:43]We've got a shortened life expectancy, that's an option. And if you're um transferring from a pension plan and it's already quite a small balance, there's an unlocking option there as well.

[00:09:54]But those are more edge case options.

[00:09:56]The two that I see more frequently used are the one-time 50% unlocking option.

[00:10:01]So, the benefit here is that you can transfer 50% into an RSP RIF account.

[00:10:08]The benefit here is that you don't have a maximum on the RSP RIF. So, if you can take advantage of this, if you're in a province or if your LIRA LIF is federally regulated, take advantage of this opportunity if you have it. Now, do your research ahead of time because not all provinces allow this, and you have to exercise this option within 60 days.

[00:10:30]And this is where some people can get caught off guard is they don't do this within the 60-day period of moving their money into a life income fund. So, coordinate with your financial institution. Make sure you have all of the paperwork done ahead of time. Make sure you don't miss this 60-day window.

[00:10:49]Now, the second option that I see used quite frequently is this small account unlocking. So, if you've got a small balance, if you've been doing the maximum withdrawal every single year, if you get your account balance low enough, if it's 50% or less of the year's maximum pensionable earnings, so in 2026 if it's under $37,300, you can withdraw more than the maximum.

[00:11:14]So, you can withdraw the entire account.

[00:11:15]So, this is a taxable withdrawal. So, make sure it fits within your retirement decumulation plan, but this allows you to avoid that annoying maximum withdrawal percentage, and you can withdraw more from that account if it fits within your plan. So, these are two more well-known options for dealing with the life income fund.

[00:11:38]There are also two lesser-known options when it comes to dealing with your life income fund account. One of those options is a RIF or RSP transfer option.

[00:11:49]So, you can actually transfer the difference between the minimum and the maximum withdrawal amount into an RSP or a RIF on a tax-deferred basis.

[00:12:01]So, you always have to withdraw the minimum amount from your life income fund, your LIF account, but if you don't need the extra money, you can still transfer the difference between the maximum and the minimum withdrawal, you can transfer that over to your RSP or RIF account on a tax-deferred basis. The benefit here is that you're getting that money out of this restricted life income fund, you're getting it into an RSP RIF account where it can continue to grow tax-free, but at least you have more control over when you can withdraw that money. There's no longer a maximum withdrawal amount. So, even if you don't need the income from your LIF account, you don't need the maximum withdrawal amount, you still should consider, if you have this option, you still should consider transferring the difference between the maximum and the minimum over to your RSP RIF account on a tax-deferred basis.

[00:12:59]Talk to your financial institution, talk to your advisor, get them to fill out those forms, get them to transfer that excess portion over to your RSP RIF account. Now, the last opportunity that many people aren't aware of is the excess return opportunity. Now, not every province allows this, so you have to figure out if you're in a province that allows this, but what it does is allows you to withdraw more than the maximum withdrawal percentage based on your investment returns for the previous year. So, let's say uh based on your age, let's say that the maximum withdrawal percentage was 6% of your LIF account. That's the maximum you could withdraw in the next year. If your investment returns were higher than that, let's say 10%, then you can withdraw up to 10% from the LIF account based on those investment returns. So, you can withdraw an extra 4% because you had higher investment returns in the previous year. Now, not every province allows this, so talk to your investment advisor, talk to your financial institution, but if you have some good investment returns in the previous year, you could have an opportunity to withdraw more than the maximum withdrawal percentage, which we do want to do if we can. We're trying to wind down that LIF account as quickly as possible.

[00:14:16]I want to share with you one horror story when it comes to the life income fund. Now, we showed you a bit of what can happen in terms of cash flow in that example on the advice platform. The restriction on the maximum withdrawal from a life income fund can cause some problems in retirement if you're not careful. Now, what happened in this situation, I had heard this from another financial planner. Um I hadn't seen it directly, but what apparently these clients had done is that they had, before engaging this financial planner, they had withdrawn all of their RSP RIF accounts before starting to tap into their LIRA LIF account.

[00:14:55]The problem is that they were then being faced with a maximum withdrawal limitation. They wanted to spend more, they wanted to gift more, they had renovations they wanted to do on the home, but they were limited by these maximum withdrawal percentages. They had no idea that this was the case. They didn't know that the order mattered so much when it came to planning their retirement decumulation. They accidentally withdrew all of their RSP RIF accounts first, not knowing that there was a maximum on those LIF account withdrawals. It caused them serious problems for them in terms of cash flow, ability to gift, and ability to spend in early and mid retirement. Now, that's an extreme example, but this is the type of situation that we want to avoid by planning ahead. We want to make that retirement decumulation plan. We want to know how much we're withdrawing, when to convert these accounts. We want to try to get that money out of the LIF account as early as possible either using the unlocking options, the 50% unlocking, or using the small balance unlocking and the maximum withdrawals.

[00:16:03]If we don't plan ahead, we can really run into some serious cash flow problems with that life income fund. Thank you so much for watching. I hope you enjoyed the video. Love it if you like and subscribe, and we'll see you at the next one.