Converting Your RRSP

When and How to Convert Your LIRA or Locked-in RRSP

By law, you may keep your LIRA or Locked-in RRSP until the end of the year in which you turn 71, then, you must convert it. You will then have two options: a Life Income Fund or a life annuity.

People are retiring earlier these days, often at age 55. In this case, is it better to convert your LIRA or Locked-in RRSP immediately at age 55 or wait until your turn 71? When the times comes for you to convert your RRSP into retirement income, you have some options: a Life Income Fund, or a life annuity.

Convert your LIRA or Locked-in RRSP immediately at age 55 or wait until you turn 71?

The answer depends on your personal situation but generally, it is better to convert it as late as possible.

You will be able to delay the conversion of your LIRA or Locked-in RRSP if your income is sufficient. You may draw an income from various sources:

• benefits from a company pension plan
  
• public annuities
  
• personal non-registered savings
  
• personal income (from, for example, a rental unit or investments)

If you use your other sources of income first, the money in your LIRA/Locked-in RRSP continues to grow tax-free.

However, if you need additional cash to pad your budget, you might have to move up conversion deadline. Then, you may convert your LIRA/Locked-in RRSP, in full or in part, into a retirement income plan.

Let's compare the characteristics of each one. An annuity requires no management on your part (the institution which sold it to you manages it), while a LIF gives you total control of your capital and lets you choose your investments.

An annuity ensures a stable retirement income. You know exactly how much you will receive, which makes it easier to manage your budget. However, this stability provides little leeway if something unexpected comes up or if you want to carry out a project (for example, a vacation or a return to school).

A LIF allows you to withdraw a different amount each time (subject to the legislated annual minimum and maximum). This gives you more freedom so you can take a cruise, help out your children financially or enjoy your favourite hobby.

Stability or Flexibility?

Before you decide, you should consider the big picture:

• your investor profile
  
• your financial needs
  
• your tax burden
  
• your age
  
• your health
  
• how much money you wish to leave your loved ones

In some cases, it may be best to combine both retirement options; convert a portion of your LIRA/Locked-in RRSP into a LIF and use the balance to purchase an annuity. Or, you can use your LIF to purchase an annuity any time you wish; just remember that once you purchase an annuity, you cannot change your mind.

A LIF under federal jurisdiction must be converted into a life annuity before the end of the year in which you turn 80. A LIF is under federal jurisdiction when the money transferred into it originates (directly or from a locked-in RRSP) from a pension fund set up by a company under federal jurisdiction (such as rail and air transport, radio and television, banks).

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