How to Convert RRSP to RRIF and LIRA to LIF in Canada

In a previous column, I explained the obligation to close registered retirement savings plans (RRSPs) by the end of the calendar year in which you turn 71. As that deadline approaches, the topic gains urgency. This follow-up looks at a closely related requirement: converting locked-in retirement accounts (LIRAs) into life income funds (LIFs) and the option to convert registered assets into annuities, whether partially or fully.

What are LIRAs and LIFs, and how do they compare to RRSPs?

LIRAs are similar to RRSPs but follow different rules because they originate from employer pension plans. Funds in a LIRA are typically locked in to protect retirement savings and generally cannot be withdrawn in younger years except for limited, needs-based exceptions. When a LIRA owner reaches the conversion deadline, the account must be converted to a LIF, which governs how money can be withdrawn. Like RRSPs that become RRIFs or are annuitized, LIRAs can be converted into annuities or remain invested under LIF rules.

How to convert a LIRA into an annuity

As a financial journalist I have written about annuitization for years, but only recently began the process personally. With the help of Rona Birenbaum, founder of Caring for Clients, my wife Ruth and I decided to start by converting Ruth’s LIRA into an annuity.

Birenbaum confirms that each person’s registered account must be converted to a RRIF by the end of the calendar year in which they turn 71. That requirement is not delayed by having a younger spouse, although a younger spouse can affect the formula used to calculate minimum withdrawals.

For example, because I turned 71 this past April, I must convert my RRSP to a RRIF before year-end and begin taking the required minimum RRIF withdrawal in 2025; the first annual minimum must be withdrawn by the end of 2025. Ruth, who is a bit younger, must convert by the end of 2025 and start withdrawals in 2026. You can convert and start withdrawals earlier if you wish, but not later.

RRIF payments can be scheduled monthly, quarterly, semi-annually or annually; frequency is simply a matter of personal preference. Our accounts are currently held at a bank’s discount brokerage, while other holdings are at a second discount broker. Birenbaum arranged the annuity through an insurer, and most of our RRSPs will remain self-directed RRIFs. We don’t need to move to full-service advisors to complete these changes.

Our plan is to keep most of the same investments and manage them ourselves while ensuring enough cash is available to meet regular withdrawals.

Using a self-directed RRIF and planning for taxes

A self-directed RRIF works much like a self-directed RRSP. At our bank, converting an RRSP to a RRIF was as simple as selecting the RRSP online and choosing conversion options: withdrawal start date, frequency and an optional tax-withholding rate. If you have a younger spouse, you can opt to base the withdrawal calculation on the spouse’s age.

Birenbaum notes many retirees leave withholding tax unspecified because the minimum RRIF withdrawal carries no mandatory withholding. However, most retirees have other taxable income, so specifying withholding can avoid an unexpected tax bill at filing time. We plan to withhold about 30% at source—consistent with our existing pension withholding—to cover other taxable income like dividends.

For example, if you have a $100,000 RRIF and withdraw $5,500 one year, there’s no mandatory withholding on that minimum amount. But with other income, taxes may still be owed at filing, so voluntary withholding or setting aside funds for tax payments is prudent. Birenbaum recommends running the numbers and holding tax funds in a high-interest account, or allowing withholding to cover anticipated liabilities. Otherwise, the Canada Revenue Agency may require quarterly installment payments.

Steps to change a LIRA into an annuity

Before an insurer can annuitize a LIRA, the account must be converted to cash so funds can be transferred and priced. That means watching the maturity dates of guaranteed investment certificates (GICs) and other fixed-income holdings. Ideally, you planned ahead so assets become cashable in the conversion year, but that doesn’t always happen.

In practice, many retirees choose to annuitize a round sum—say $50,000 or $100,000—and leave the remainder in a RRIF until it can be added later. The same caution applies to selling equities or ETFs: try to avoid realizing significant losses on a forced sale. In our case, some LIRA assets can remain invested until the end of 2025, though we may start earlier to learn the process and observe tax consequences.

The paperwork is straightforward. We provided a recent LIRA statement, met online with an insurance-licensed advisor to complete the application, and signed a transfer form authorizing the cash move to the insurer for a deferred annuity. Transfers typically take a few weeks, with the final annuity rate set when the insurer receives the funds. Registered transfers use forms such as the T2033 (RRSP-to-RRIF transfer) to move money between institutions.

How annuity purchases work

Semi-retired actuary and author Fred Vettese has long recommended that retirees consider life annuities, particularly joint-and-survivor annuities that provide lifetime income to both spouses. He notes annuity pricing is more favorable now than in 2018 or early COVID years because higher interest rates have improved payouts.

Still, Vettese warns that inflation erodes fixed annuity payments, making them less attractive if inflation risks are high. He continues to suggest allocating up to about 20% of retirement savings to an annuity for those who are risk-averse and want to mitigate longevity risk. If you hold both an RRSP and a LIRA/LIF, he advises using the LIF funds first for annuitization because LIFs impose stricter withdrawal limits than RRIFs.

Withdrawing funds from a LIRA/LIF

Matthew Ardrey, senior financial planner at TriDelta Private Wealth, emphasizes the differences between RRSPs and LIRAs. While RRSP funds can be withdrawn at any time, LIRAs are subject to age and other restrictions because they represent transferred pension value. In most jurisdictions you must be at least 55 to access LIRA funds outside the allowed conversion and unlocking rules.

Ardrey outlines three common exceptions where limited withdrawals are possible:

1. Financial hardship
   Low-income individuals may withdraw on a sliding scale: the maximum is 50% of the year’s maximum pensionable earnings (YMPE) for zero income, tapering down as income rises.
2. Debt repayment
   Withdrawals can sometimes be approved to cover mortgage arrears or urgent housing needs.
3. Medical expenses
   High medical costs relative to income can justify withdrawals, up to a maximum tied to YMPE.

Other, more specific conditions may permit a full cash withdrawal or transfer to an RRSP/RRIF, such as shortened life expectancy (with medical proof), non-residency of Canada for at least two years, or a very low account balance (below a 20% YMPE threshold).

Like RRSPs, LIRAs must be converted to LIFs by the end of the year you turn 71, and minimum withdrawals generally begin the following year. However, LIFs also impose an annual maximum withdrawal limit that can constrain retirement income planning. In many federally regulated and some provincial LIRAs, you can “unlock” up to 50% of the LIRA value within 60 days of conversion; that unlocked portion can be taken as cash (taxable) or transferred to a RRSP/RRIF, removing the LIF maximum-withdrawal restriction from that amount.

Should you annuitize?

Ardrey evaluates annuitization by comparing the guaranteed income an annuity provides to the income a retiree’s investment portfolio would need to generate to match that guaranteed stream, often called the “hurdle rate.” Longevity is the primary unknown: the longer you live, the more value a guaranteed annuity delivers. Conversely, if you die early without ensuring survivor benefits or guarantees, the capital backing an annuity may be lost to heirs, whereas retained assets could pass to a spouse or beneficiaries.

Read more Retired Money columns:

• How to double your CPP income
• Retirement income for life
• Switching from RRSP to RRIF
• How to plan for retirement