Picking up from last month’s blog post, let’s continue our look at locked-in plans. Similar to Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs), locked-in plans also consist of pre-retirement plans and post-retirement plans. In addition, specific rules relate to unlocking amounts from these plans.
Pre-retirement locked-in plans
Pre-retirement locked-in plans are considered RRSPs for federal income tax purposes. They include Locked-in Retirement Savings Plans (LRSPs), Restricted Locked-in Savings Plans (RLSPs) and Locked-in Retirement Accounts (LIRAs), depending on the applicable legislation. Currently, all LRSPs and RLSPs are subject to federal pension legislation. All other jurisdictions, namely the provinces, use the term LIRA.
While RRSPs allow plan holders to withdraw funds at any time without limit, funds from LRSPs, RLSPs and LIRAs are accessible only under limited circumstances. If the plan holder wants to make a withdrawal, he or she must reach the required age to transfer funds to an allowable post-retirement plan or become eligible to access one of the unlocking options described in the applicable pension legislation.
Post-retirement locked-in plans
Similar to RRSPs, all pre-retirement locked-in plans must collapse and convert to a maturity option by the end of the year the plan holder turns age 71. The earliest age at which a pre-retirement locked-in plan can convert to a maturity option varies by pension legislation, with some having no age requirement at all. Four types of post-retirement locked-in plans are available, depending on pension legislation: Life Income Funds (LIFs), Restricted Life Income Funds (RLIFs), Locked-in Retirement Income Funds (LRIFs) and Prescribed Registered Retirement Income Funds (PRIFs).
Post-retirement locked-in plans are considered RRIFs for federal income tax purposes. Similar to RRIFs, there is no mandatory minimum withdrawal from post-retirement locked-in plans in the year they are created. For every subsequent year, a prescribed minimum amount based on the plan holder’s age must be withdrawn. Unlike RRIFs, there is an annual maximum withdrawal limit in each year; the governing pension legislation of the locked-in plan dictates the calculation.
Access to a lump-sum payment from a locked-in plan is generally restricted. However, an eligible plan holder may exercise available unlocking options if he or she meets all the requirements and conditions in the pension legislation governing the locked-in plan (including obtaining the written consent of the plan holder’s spouse or common-law partner, as required in some legislation and unlocking categories). Some legislation has similar unlocking categories, but the exact requirements vary from federal legislation to provincial legislation and province to province.
Some unlocking options may have tax consequences for the plan holder; plan holders are strongly encouraged to speak to a financial professional before making any important financial decisions. We highlight some options that may enable unlocking below, but these are not permitted uniformly across the provinces and territories of Canada. Reach out to us to confirm unlocking eligibility.
In general, this unlocking option allows an eligible plan holder who has reached the early retirement age (usually age 55) but has not yet reached the normal retirement age (usually age 65) to withdraw an extra amount exceeding the annual maximum withdrawal limit while preserving his or her Canada Pension Plan (CPP) pension until the plan holder reaches the age at which he or she can receive an unreduced CPP pension.
When a plan holder is in a dire position of financial need, he or she can complete the applicable application along with other required documentation to unlock an extra amount exceeding the annual maximum withdrawal limit. The regulator usually creates a new application for each year. In general, the plan holder must meet all the criteria outlined in the pension legislation governing the locked-in plan, such as not exceeding a specific annual income threshold amount, experiencing residential eviction, or facing medical expenditures that a Canadian registered physician has already approved.
Shortened life expectancy
In general, an eligible plan holder who has been diagnosed with a terminal illness may unlock his or her entire locked-in plan, provided that the Canadian registered physician of the plan holder is willing to complete a certification stating that the plan holder’s life expectancy has been shortened considerably or, as some legislation requires, is less than two years.
An eligible plan holder may unlock up to 50% of the locked-in plan, but not more than once. In general, the plan holder must meet the age requirement (usually age 55) and the unlocked funds can transfer to an RRSP or RRIF on a tax-deferred basis. Some legislation allows direct redemption. If the plan holder decides not to unlock the entire 50%, there is no opportunity to unlock the remaining eligible portion later.
In general, an eligible plan holder who has ceased to be a Canadian resident for more than two years may complete and file Form NR73: Determination of Residency Status (Leaving Canada) with the Canada Revenue Agency (CRA) to obtain a CRA letter declaring the plan holder is a non-resident for the purposes of the Income Tax Act. In addition, some legislation requires the plan holder to complete an application provided by the applicable regulator.
When the balance of the locked-in plan is too small for potential growth or to provide a reasonable incremental retirement income, as determined by the governing pension legislation, an eligible plan holder may unlock the entire plan balance. In general, the plan holder must meet the age requirement and the balance of the locked-in plan must be below a specified threshold amount.
One-time transfer of three times the maximum
For New Brunswick locked-in plans only, an eligible plan holder can make a one-time transfer of three times the LIF’s annual maximum amount to a RRIF. This transfer option is tax-deferred, the transfer amount cannot exceed 25% of the LIF’s value, and the unlocking request must be approved by the New Brunswick regulator.