Tax implications of making transfers between registered accounts

They’re locked in because they are intended to provide income throughout your retirement, so you are limited in how much you can withdraw each year from a resulting LIRA, subject to annual maximums based on your age. Provinces and territories determine the earliest age of withdrawals, which can be as young as 50, but more commonly not until age 55.

When can you withdraw from a locked-in account in Canada?

There are exceptions when a locked-in account can be withdrawn, either partially or entirely. Exceptions include extreme financial hardship or a shortened life expectancy; some provinces also allow unlocking based on your age.

In Ontario, you can access up to 50% of the balance of your LIRA by transferring it into a life income fund (LIF). Within 60 days of the transfer to the LIF, you can withdraw up to 50% of that balance, or transfer some or all of it to a registered retirement savings plan (RRSP). The benefit of transferring to your RRSP is that it can happen on a tax-deferred basis, and the subsequent withdrawals are not subject to the annual LIF maximums.

What happens when you withdraw from a LIF

When you take a withdrawal from a LIF, Suzanne, that is reported on a T4RIF slip for tax purposes. Since you transferred 50% of your LIF to your RRSP, it should be reported in box 16 as a “taxable amount,” as well as box 24 as an “excess amount transferred to RRSP.” This will increase your RRSP contribution room for the year by the amount of the transfer. When the transfer is made within 60 days of opening the LIF, which it sounds like that is what happened for you, given the way they reported it on your slip, you can make the RRSP contribution without impacting your available RRSP room, Suzanne.

The financial institution was right to issue you an RRSP contribution receipt because you must report the income from the T4RIF slip, and then deduct the deposit to the RRSP as a contribution—it’s a wash in this case.

If you took a withdrawal from your LIF and transferred only some of it to an RRSP, the RRSP contribution and allowable deduction would be less than the full withdrawal. And, you would have an income inclusion and resulting tax liability.

Transfers between registered accounts: Do you pay tax?

Generally, transfers between registered accounts like RRSPs, LIRAs, registered retirement income funds (RRIF)s, LIFs, registered education savings plans (RESPs) and tax-free savings accounts (TFSAs) do not have tax implications. The funds transfer over on a tax-free (for TFSAs) or tax-deferred (for other accounts) basis.

Some Canadians may want to access locked-in funds because they need the money immediately. Other Canadians may just want to minimize the amount of money that is subject to maximum withdrawal restrictions.

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