Financial problems are stressful for everyone, but when they occur at the same time you’re thinking about retirement, they can be frightening as well. If you own a Life Income Fund and bankruptcy is a solution you’re considering, take a moment to familiarize yourself with some of the following definitions and regulations. Knowing which accounts are protected and how bankruptcy will affect them can help calm your fears.
A Canadian Retirement Fund Primer
Saving money for retirement is a high priority for most Canadians, but deciding where to put those funds at retirement can be mind boggling. LIF, LRIF, LIRA are just a few of the numerous acronyms to keep track of.
Money you save during your active working life is usually deposited into a Registered Retirement Savings Plan (RRSP). Deposits to your RRSP are made with pretax dollars and earn interest that helps you to grow your retirement fund year by year. When you are ready to retire and begin using your savings, you must transfer your money to a different type of account.
Just as your RRSP was a place to deposit cash for retirement, an LIF is an account that allows you to withdraw money. Usually, you must be 55 to begin withdrawing funds without paying a penalty, but no older than 70. Provincial law dictates the exact age limits and they vary a bit from province to province.
Bankruptcy and Your Retirement Money
Federal and provincial legislation protects your retirement funds from seizure. Neither your creditors nor your trustee can take the money you have set aside in retirement accounts. Because of relatively new laws, your RRSP is safe from seizure, except for funds you have deposited within the 12 months prior to your filing.
When it comes to your Life Income Fund and bankruptcy, it’s a bit different. Your balance is safe and can’t be touched. However, money you withdraw is counted as income and may be subject to an excess income payment. Each year the federal government publishes a chart that determines how much money you can earn while bankrupt. If you earn more than the amount allowed, the chart also indicates how much you will need to pay to your trustee. Your licensed insolvency trustee distributes excess income payments to your creditors.
Because the laws governing bankruptcy exemptions and many of the laws regulating retirement funds are determined by each province, it’s important to seek the advice of a local licensed insolvency trustee. Saskatchewan, Prince Edward Island, and Nova Scotia have different retirement account setups than other provinces. Quebec and Ontario have different RRSP withdrawal age requirements. These differences may also affect your bankruptcy.
If you have too much debt and not enough cash, your Life Income Fund and bankruptcy can work together to see you through your financial crisis and retirement.