Ottawa eases locked-in RRSP rules for Canadians facing hardship
Older Canadians and those facing hardships will be allowed to withdraw as much as $22,450 from their federally regulated pension savings accounts, including locked-in RRSPs, under changes announced Thursday by the federal government.
The Finance Department said it was introducing the new rules in how Canadians who have federally regulated life income funds and locked-in registered retirement savings plans as previously promised in the budget.
"Many people, such as seniors, pensioners and individuals facing financial hardship, will now have greater freedom to move their investments and use the money when they want, for what they want," said Finance Minister Jim Flaherty said in a release.
"These changes simply reflect the greater range of employment and lifestyle choices available in our fast-paced global economy."
The new rules only affect about 10 per cent of Canadian pension plans that are federally regulated, although most provinces have already moved to increase flexibility in their locked-in savings plans.
In an explanation of the changes, the department said the current rules placed too many limits on withdrawals that prevented Canadians from using their retirement savings as they saw fit or in addressing special needs.
Under the changes, individuals 55 years and older with holdings of up to $22,450 in federally regulated locked-in funds will be able to wind up their accounts or convert to a tax-deferred savings vehicle.
As well, Canadians 55 years and older will be able to convert on a one-time basis 50 per cent of their life income funds into a tax-deferred savings account with no maximum limit.
And all individuals facing financial hardship will be entitled to withdraw up to $22, 450 this year, with the maximum increasing in the future based on the average industrial wage.
Canadians moving savings from a locked-in to an unlocked savings vehicle would not be subject to taxes. But funds withdrawn from the savings vehicle would be subject to federal income tax.
The department release lists hardship as individuals with low income, with a high disability or facing medical costs.
But officials said there would be no hard-and-fast financial test to determine hardship, although individuals under 55 seeking to qualify under the hardship rule would need to complete a self-assessment form.
Although he had not seen the specific changes, C.D. Howe economist William Robson said that in general he was in favour of more flexibility in the way people save and their ability to access those funds.
"There are specific rules in locked-in RRSP plans that if you have financial hardship you can get at the money," he said.
"But the rules are complicated and it takes time...those locked-in plans can really cause a lot of grief. People could be in hardship, but filling out the forms and dealing with the bureaucracy and waiting could mean that the solution isn't all that great."
The rule changes have little tax implications for the government, although the department estimated the indirect costs to the government would be about $5 million.