RRSPs and locked-in accounts

Region: Ontario Answer # 179

The Government of Canada has established special tax rules for retirement investments. These rules were created to encourage people to save for their retirement. Investments made under these special rules are called Registered Retirement Savings Plans, or RRSPs.

RRSPs are tax deferral plans that allow you to put a percentage of your income into an investment account. RRSPs are registered with Canada Revenue Agency. You will not have to pay tax on the income you contribute to your RRSP until you withdraw the money.

The Income Tax Act describes eligible investments for RRSPs. The money that you put into an RRSP can be invested in mutual funds, GICs, term deposits, stocks, bonds, or mortgages. The RRSP plan holder is responsible for ensuring that the investments held in the RRSP are eligible investments.


Benefits of RRSPs

There are many benefits to investing in an RRSP.

1. Reduce current income tax payable

First, RRSPs usually reduce the amount of income tax you have to pay. Your RRSP contribution for a particular year is included on your income tax return as a deduction. This reduces the amount of tax you must pay in the year that you make the contribution, because it reduces your annual taxable income for that year. Essentially, you do not pay tax on the money you invested in your RRSP until you withdraw from the plan. If you withdraw the money during your retirement or at a time when you have very little income, you will be in a lower tax bracket and you will pay less income tax than if you had paid tax on the money when you earned it.

2. Tax sheltered investment

The second advantage is that RRSP investments are tax-sheltered. This means that any increase in the value of your investment will not be taxed while the money is in the RRSP. Because your RRSP is tax-sheltered, it grows faster than it would if you had to pay tax on it every year. Any gain in your investment will be added to the principal amount you contributed. The entire investment is tax sheltered, and you will not have to pay tax on it until you start withdrawing money.


3. Funds for retirement or low income periods

Third, RRSPs are a good way to save for your retirement or for some other time when you need to supplement your income. For example, if you decide to take time off to raise your children, or if you quit your job to start your own business, you can use your RRSP as a source of income. You should make sure that your RRSP allows you to withdraw money when you want to. Some RRSP plans lock in your investment for a certain period.


4. Split retirement income

Finally, RRSPs allow you to split your retirement income with your spouse, or common-law partner, by allowing the person with the larger income to make contributions to their spouse’s, or partner’s RRSP. The result is that each spouse, or common-law partner will have their own RRSP and they will each be about the same amount. Consequently, both spouses, or common-law partners can withdraw money from their respective RRSP, and together, the couple will be taxed on two smaller incomes rather than one single larger income. The overall result is that the couple will pay less tax.


Locked-in Accounts

When an employee leaves a company, their registered pension plan funds are transferred to either a locked-in RRSP or Registered Retirement Income Fund (RRIF), (if it is a relatively small amount), or to a locked-in account (LIA). Generally, your company’s retirement information package will outline the permissible transfer and investment options.

If you change jobs, the pension plan which your former employer offered may allow the value of your pension benefit to be transferred directly to an LIA. The funds held in the LIA are administered under the same federal or provincial pension legislation under which the pension plan is administered.

There are several types of LIAs, including:

  • Locked-In Retirement Accounts (LIRAs)
  • Life Income Funds (LIFs)
  • Life Annuities, purchased from an insurance company your pension plan permits.


LIRAs are similar to RRSPs, although there are two main differences:

  • LIRAs are locked-in until retirement, and
  • unlike RRSPs, you are not allowed to make further contributions or withdrawals from the LIRA.

Since you cannot withdraw from an LIRA, in order to receive income from the locked-in account, you are required to convert it into another type of account.

Converting your Locked-in Retirement Account (LIRA)

Upon retirement or reaching 71 years of  age, you are required to convert your LIRA into one of these two types of funds:

  • Life Income Fund (LIF), which is a form of a Registered Retirement Income Fund (RRIF). An LIF provides regular retirement income and is subject to minimum and maximum income limits. LIFs are governed by the Ontario Pension Benefits Act and the federal Income Tax Act.
  • Life Annuity, which provide periodic payments, usually for the life of the annuitant. Annuities are normally purchased from insurance companies and the payments are made pursuant to the terms of the insurance contract.

As of January 2009, Locked-in Retirement Income Funds (LRIFs) can no longer be bought or sold. Funds in an existing LRIF may be transferred to a new LIF, or to an insurance company to purchase an annuity.

Registered Retirement Income Funds (RRIFs), which are personal retirement income funds offered by financial institutions, are used to provide a flow of minimum payments and are subject to minimum annual income payment requirements. In Ontario, funds from a registered pension plan cannot usually be transferred to a regular unlocked RRIF. For general information, contact Canada Revenue Agency.

For legal advice and assistance with tax planning, a CRA tax dispute, or other tax issues, contact Tax Chambers LLP

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