In the 2008 federal government budget (and in details released in May), the federal government loosened the rules regarding registered retirement accounts that held locked-in money that people have transferred out of federally registered pension plans.
The new rules are in effect now, although your financial institution has until Nov. 8, 2008, to get the necessary documents prepared.
Background
When you contribute money to an RRSP, you can withdraw that money anytime, subject to adding the withdrawal to your taxable income in the year of withdrawal.
The same thing holds true for a RRIF (Registered Retirement Income Fund). A RRIF is created when you roll over money from an RRSP in order to get regular income from your account. A minimum withdrawal is required each year, but no maximum is specified.
However, some people have registered plans that were created by transferring money out of a pension plan. These plans are federally called Locked-In RRSPs, and LIRAs (Locked-In Retirement Account) in most provinces. The money in these plans is "locked in", which means that withdrawals are not allowed.
The parallel structure to a RRIF is either a LIF (Life Income Fund) or LRIF (Locked-In Retirement Income Fund). These are the income options, and the method used to withdraw money. However, there is a maximum withdrawal allowed each year.
In a number of provinces, a planholder can apply to unlock and make a taxable withdrawal from a locked-in plan. In Manitoba, a one-time application can be made to withdraw up to 50 per cent of a locked-in plan. In Saskatchewan, the full amount of a plan can be unlocked.
However, until now, no such flexibility has been provided for locked-in plans that were transferred out of federally-regulated pension plans. To facilitate this, the federal government will be introducing more alphabet soup into the lexicon.
New Federal Rules
Two new plans will be introduced this year -- the Restricted Life Income Fund (RLIF) and Restricted Locked-In Savings Plan (RLSP). From such plans, withdrawals will be allowed in the case of "small balances" in such accounts, financial hardship of the planholder and a one-time, 50 per cent unlocking, similar to the Manitoba rules.
The "small balance" amount is going to be $22,450 in 2008. It is defined as 50 per cent of the CPP yearly maximum pensionable earnings (YMPE - $44,900 in 2008) amount. If the planholder is 55 or older, then withdrawals (or transfers to RRSP or RRIF) can be made, but only from LIFs, RLIFs or RLSPs, not from Locked-In RRSPs. The applicant must certify that all holdings in all federal locked-in plans are less than the current small balance limit.
The spouse (if any) will have to consent to the withdrawal and the plan owner must sign an acknowledgment that the funds may lose their creditor protection, will be taxable and that he or she understands the implications of withdrawal. These forms must be signed before a notary public, commissioner or other person authorized to witness affidavits.
"Financial hardship" can involve medical or disability related expenses (if such expenses are expected to exceed 20 per cent of income), or if total income will be less than 75 per cent of the YMPE. This applies to planholders of any age. Similar forms must be signed and a doctor's certificate included for the medical applications.
Finally, people 55 or older can withdraw up to 50 per cent of their LIF or transfer that same amount to RRSP or RRIF. Money from the LIF must first be transferred to the new RLIF then, within 60 days, 50 per cent transferred to an RRSP or RRIF, or withdrawn. The 50 per cent remaining in the RLIF is subject to maximum and minimum withdrawal rules.
It sounds complicated, but that's to ensure each plan only get transferred once.
As we have said in the past when the Manitoba rules were introduced, there is no rush to do this, unless you need the money out now. You already have flexibility to change your investments within any of these plans without making a taxable withdrawal, and your investment options are wide open, from stocks to GICs.
Make sure any registered plan withdrawal is based on a thorough look at the tax ramifications and your other options for the money.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column appears Fridays. You can e-mail him at
dchristianson@wellwest.ca
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