RRIFs and LIFs have many similarities. They are both registered accounts, which means that the money you earn from investments is not subject to tax. They also both offer a variety of investment options.
However, there are also some key differences between RRIFs and LIFs. RRIFs offer more flexibility in terms of withdrawals, while LIFs offer more certainty in terms of income.
In this article, we will compare RRIFs and LIFs in terms of investment options, withdrawal requirements, benefits, guaranteed income, and flexibility, in addition to other significant aspects of the funds.
RRIF vs LIF: An Overview
Let’s start with an overview of both account types, what they are, along with their pros and cons.
What Is an RRIF?
A Registered Retirement Income Fund (RRIF) is a type of retirement savings account that allows you to withdraw money from your savings during retirement. RRIFs can be opened at any age, but most people open them when they are forced to convert their RRSPs to RRIFs at the end of the year they turn 71.
To open an RRIF, you must transfer money from a Registered Retirement Savings Plan (RRSP).
Once you have opened a RRIF, you can choose how much money you want to withdraw each year. There is no maximum withdrawal amount, but there are minimum withdrawal amounts.
Here are some of the pros and cons of RRIFs:
Pros
- Flexible: You can choose how much money you want to withdraw each year and when you start withdrawing money. So long as. the withdrawals are more than the prescribed minimum.
- Tax efficient: Investment income within the RRIF is not taxed.
- Wide range of investment options: RRIFs offer a wide range of investment options, so you can choose investments that match your risk tolerance and investment goals.
Cons
- Minimum withdrawal requirements: RRIFs have minimum withdrawal requirements that increase as you get older.
- Tax implications: All income from RRIFs is fully taxable.
- Estate planning considerations: If you die with money in your RRIF, your beneficiaries may have to pay income tax on the remaining balance.
What is a LIF?
A Life Income Fund (LIF) is a type of retirement account in Canada that is designed to provide you with a guaranteed income stream for the rest of your life. LIFs are typically funded with money from a locked-in retirement account (LIRA).
To open an LIF, you must transfer money from a LIRA.
This is the biggest difference between RRIFs and LIFs. LIRA’s are typically retirement accounts provided by employers. When you leave that employer they transfer funds into a LIRA instead of a traditional RRSP. This LIRA then becomes a LIF the year you turn 71.
Once your LIF is open, you must start withdrawing money each year. The amount you must withdraw is calculated based on your age and the balance of your LIF.
Overall, LIFs can be a good option for retirees who want a guaranteed income stream for the rest of their life.
Pros
- Guaranteed income: LIFs offer a guaranteed income stream for the rest of your life. But remember this “guarantee” is done by having maximum withdrawals
- Tax efficient: Investment income within the LIF is not taxed.
Cons
- Lack of flexibility: LIFs are less flexible than RRIFs. You must start withdrawing money each year, and you cannot withdraw more than the minimum amount required.
- Minimum withdrawal requirements: LIFs have minimum withdrawal requirements that increase as you get older.
- Estate planning considerations: If you die with money in your RRIF, your beneficiaries may have to pay income tax on the remaining balance.
What Are the Similarities Between RRIFs and LIFs?
RRIFs and LIFs are both registered retirement income funds (RRIFs) in Canada. This means that investment income earned within the account is tax-sheltered
Other similarities between RRIFs and LIFs include the following.
- Investment options: Both RRIFs and LIFs offer a wide range of investment options. This means that you can choose investments that match your risk tolerance and investment goals.
- Minimum withdrawal requirements: Both RRIFs and LIFs have minimum withdrawal requirements. These requirements increase as you get older.
- Tax implications: All income from both RRIFs and LIFs is fully taxable. You will pay income tax on the money you withdraw from your RRIF or LIF.
- Death benefits: If you die with money in your RRIF or LIF the accounts can be rolled over tax free to your spouse. But on the death of the surviving spouse RRIFs and LIFs have the potential for large tax consequences
What Are the Differences Between RRIFs and LIFs?
The main difference between RRIFs and LIFs is that LIFs offer a guaranteed income stream for the rest of your life, while RRIFs do not. LIFs are also less flexible than RRIFs, with restrictions on how much money you can withdraw each year.
To further illustrate, here are some key differences between the two.
- Flexibility: RRIFs are more flexible than LIFs. With an RRIF, you can choose how much money you want to withdraw each year, and there is no maximum withdrawal limit. With a LIF, there is a maximum withdrawal percentage that you must follow. This means that you have more control over your income with a RRIF.
- Guaranteed income: LIFs offer a guaranteed income stream for the rest of your life. RRIFs do not offer this guarantee. This means that you may be at risk of outliving your savings with an RRIF, but you have more flexibility with how you withdraw your money.
Here is a table that summarizes the similarities and differences between RRIFs and LIFs:
| RRIF | LIF | |
| Guaranteed income | No | Yes |
| Flexibility | High | Low |
| Minimum withdrawal requirements | Yes | Yes |
| Investment options | Wide range | Wide range |
| Tax implications | All income is taxable | All income is taxable |
| Tax on Death | Tax-free to surviving spouse, taxable to other beneficiaries | Tax-free to surviving spouse, taxable to other beneficiaries |