Thursday, 19 November 2009

Worthwhile Rule Changes to Ontario Locked-in Retirement Accounts

In what I would call an incremental but still very beneficial improvement, the Financial Services Commission of Ontario announced a few months ago in O.Reg. 209/09 that holders of LRIFs or old and new LIFs will be able, as of January 1, 2010, to unlock up to 50% of the account on a one-time basis. The unlocking can be a straight taxable withdrawal or a tax-free transfer into an RRSP or a RRIF.

O.Reg.209/09 also changes the maximum withdrawal calculation to either the old formula (under which the percentage allowed changes every year and is published in December by the FSCO - e.g. 2009 tables here in Schedule 1.1), or the account's investment return for the previous year, which ever is greater. In good market years with strong returns, that could increase the amount that can be withdrawn or transferred tax-free into a RRSP or RRIF. The annual maximum withdrawal/transfer is separate and additional to the one-time transfer.

These measures add flexibility and control for the investor since more can be withdrawn as needed or put into RRSP/RRIF accounts that are still tax-deferred but which have no limits on withdrawals. It also allows people like me with a number of separate locked-in accounts to consolidate by moving the Ontario plan assets into another existing account.

When one has multiple accounts, portfolio rebalancing gets awkward and complicated. I anticipate being able to reduce my Ontario LIRA, which I will soon convert into a LIF, to the point (in 2008 that point was officially $18,520 according to FSCO's Form 5, which is used to apply for the transfer) where I can ask for the remainder to be transferred into my RRIF under another rule which allows a 100% withdrawal/transfer for those over 55. The small amount rule applies only to the total of Ontario-regulated locked-in accounts so those who also have accounts regulated by other provinces or the federal government (hooray, that's me) are more likely to benefit.

FSCO's L200-302 details all the rules as of May 2008 regarding Ontario locked-in plans, including provisions for early withdrawal due to shortened life expectancy, becoming non-resident of Canada and financial hardship.


Michael James said...

It looks like this opportunity to transfer some locked-in money to a regular RRSP runs out in 2012. Since I won't be 55 before then, this is all moot for me. Do you have any theories on the motivation for this change?

CanadianInvestor said...

I suspect (but don't really know) the reason for the loosening has to do with long-standing demands from CARP and retired individuals for such a thing, exacerbated by the effects of credit crunch market drop last year.

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