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Unlocking your RRSP

Andy Wong
Guest columnist
Monday, July 19, 2010

Previous columns 

I have been asked this question a few times; how do I cash out my Locked-in Registered Retirement Savings Plan (Locked-In RRSP)? This response was published in an older article, but here it is revisited with current information.

The short answer is - you cannot crack your Locked-in RRSP vault, except under specific conditions. And that's the whole point - the locked-in plan prevents you from raiding your pension funds freely.

But first - what is a Locked-In RRSP?

You created a Locked-in RRSP when you chose to transfer money from your employer's pension plan after you left your employment. Think of the Locked-In RRSP as a temporary but impenetrable vault that holds those pension funds for your retirement.

Generally speaking, you have to convert your Locked-in RRSP to a Life Income Fund (LIF) to access those funds. You can then withdraw up to a maximum amount annually from your LIF. The annual amounts are approximately five per cen of your LIF value at age 50, 5.7 per cen at age 60 and 7.0 per cent at age 70, etc. At those low withdrawal rates, the LIF rules are clearly designed to preserve your retirement funds over your lifetime.

Here is an important point. A locked-In RRSP set up with funds transferred from a pension created in the NWT or NU (say you worked for the GN or GNWT) is governed by federal pension rules. According to federal pension rules, you may transfer funds in your Locked-In RRSP to a LIF and withdraw the maximum annual amount immediately.

For example, if you are 49-years-old (or younger), have an NWT/NU pension plan provided by an NWT/NU employer, you could quit your job on Monday, transfer your pension into a Locked-in RRSP on Tuesday, convert it to a LIF on Wednesday and withdraw maximum annual limit immediately. This is speaking hypothetically because the paperwork will progress less urgently than your cash needs.

New federal LIF rules, introduced in 2008, also allow for one-time withdrawals from an NWT/NU Locked-in RRSP or LIF under three specific situations.

If you are at least 55-years-old with a NWT/NU Locked-in RRSP or LIF worth less than $23,600 (2010 limit), you can wind it up and transfer the money to a regular RRSP. Once the money is in a regular RRSP, there are no withdrawal restrictions (except for the tax bite).

If you are at least 55-years-old, you can transfer up to 50 per cent of your NWT/NU LIF funds into a regular RRSP.

For example, if you are, say, 60-years-old, have a LIF worth $400,000, you could transfer $200,000 into a regular RRSP, allowing you unrestricted access to those RRSP funds.

If you face financial hardship, at any age, you can withdraw up to $23,600 a year from your NWT/NU Locked-in RRSP or LIF.

Unlocking due to financial hardship is based on your expected income for the year. The allowable amount is $23,600 for $0 expected income to no withdrawal when the expected income is $35,400 or higher. The hardship withdrawal rules also apply if you incur high disability or medical-related costs.

Your financial institution should be able to explain if you are can make withdrawals under the new federal pension rules. Be forewarned these special withdrawal rules are new. Your financial institution may not be up to speed, therefore expect to be treated like a lab rat. The new unlocking rules for federally regulated are available at: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=1556

Andy Wong, CGA, CFP, is a tax consultant at MacKay LLP, Chartered Accountants, in Yellowknife. He can be reached at: andywong@yel.mackay.ca