Locked-in retirement account (LIRA)
What is a LIRA?
Keep your savings safe for retirement
A locked-in retirement account (LIRA) is a Canadian registered account designed to hold and invest pension assets that you and your former employers contributed to . Investment income within the LIRA is tax-deferred – this means you won’t have to pay income tax until you withdraw funds.
How LIRA work?
Assets within a LIRA are “locked in,” which means you generally can’t make any withdrawals until you reach a specific age(55 years old in Ontario). The “locked in” rules of a LIRA are meant to restrict your access to your pension assets. These restrictions are similar to the ones that would’ve applied had you left the assets in your former employer’s pension plan. The specific “locked in” rules are determined by applicable federal, provincial, and territorial pension legislation.
Let’s say you have a pension plan with your employer. When you leave your job , you’d have to decide what to do with this pension. Depending on your specific situation and terms of the plan, you may have three options:
- leave your pension assets where they are,
- purchase a payout annuity, or
- transfer your pension assets into a locked-in account like a LIRA.
Where to open a LIRA account?
Most financial institutions can open a LIRA account. For example: banks, credit unions, trust and loan companies, insurance companies.
Who is eligible, and who is LIRA for?
If you are under 71 years of age with an employer-sponsored pension plan you are eligible to open a LIRA.
*You can hold a LIRA until December 31 of the year in which you reach age 71. After this, your LIRA must be converted to a life income fund (LIF).
LIRA withdrawal rules
No withdrawals are permitted until you’re 55 years old. “Locked-In” also means no access to your money until the rules say so! You may “unlock” when you turn into your 55, at this point, depending on your jurisdiction, you have a few options such as transferring your funds directly into another registered account or buying a life annuity. Remember, funds in registered accounts and life annuities are tax-sheltered. This means you won’t be taxed until you make withdrawals or receive payments.
Special exceptions for early LIRA withdrawals
There are special exceptions that allow withdrawals at any age. These exceptions may apply to you if you find yourself in one of these circumstances:
you’re facing financial hardships (such as being unable to make rent or mortgage payments or having a high amount of medical expenses),
- you’re no longer a resident of Canada,
- you have a reduced life expectancy, or
- you have a small amount of assets in your LIRA.
Please note you may need your spouse or common-law partner’s consent in order to make early LIRA withdrawals related to a special exception.
In the event of death
When you die, your LIRA is automatically transferred to your spouse, unlike an RRSP, where you can choose the beneficiary.
Pros and Cons of Opening a LIRA
Advantages
- All funds within the LIRA are tax-deferred until they are withdrawn.
- You have control of your pension funds and where they are invested – instead of an employer deciding for you.
- Eliminates the risk of your former employer going out of business and you losing your pension funds.
- “Locked-In” means that it lessens the temptation for those of us who lack self-restraint and might try to use pension funds earlier than planned. However, with certain unlocking exceptions, for those who qualify may also have the option to unlock LIRA.
Disadvantages
- No withdrawals are permitted until you’re 55 years old. “Locked-In” also means no access to your money until the rules say so!
- Flexibility is limited when compared to an RRSP. RRSPs allow you to continue to make contributions over the life of the account, but you can’t make continued contributions to a LIRA once it has been set up.
- Varied legislation by province can make it tricky to track what you’re allowed to do with your money and when.
- Your LIRA must be converted to a life annuity fund or another retirement-based type fund (Life Income Fund (LIF), Locked-in Retirement Income Fund (LRIF)) before the end of the year in which you turn 71.
- Financial institutions can charge high management fees for LIRA.
Ai Financial services on LIRA
Your One-Stop Shop for Segregated Funds
We open accounts for clients in financial institutions such as iA and Manulife and invest in segregated funds; we can also help clients transfer the funds required for LIRA from other institutions (according to different needs).
LIRA FAQs
Adding funds will happen only once in the LIRA’s lifetime when your pension funds are transferred in. Given that the only contribution you can make is the original transfer of pension assets into the account, there isn’t much else to adding funds. A LIRA can earn interest and continue to experience growth this way, but you personally can’t contribute new money.
LIRA withdrawals are guided by provincial legislation so it depends on where you live to determine how much you can withdraw and when. Depending on your province, up to 50% of your LIRA could be unlocked at the age of 55. When that 50% is unlocked you have the option of withdrawing funds to use in retirement, though keep in mind this money is now considered income and will be taxed. You also have the option to move unlocked funds to an RRSP or life annuity, in which they will remain tax-free until withdrawn from these accounts.
LIRA funds offer tax-deferred growth and are only taxed once withdrawn when you retire and are likely in a lower tax bracket. The taxable portion of this income will also be minimized by slow withdrawals over many years, which means more bang for your buck and less tax burden on you. If you are under 71 years old, you may also transfer funds into an RRSP or another type of retirement savings plan where they will remain tax sheltered until withdrawal, depending upon provincial regulations.
No.
You cannot use the savings in a LIRA to secure a loan or credit of any sort. Your savings are also protected from collection agencies in the event of any seizures, until the time of withdrawal when they become income.
Funds from a LIRA can only be transferred for certain reasons, including:
- To a pension fund of a new employer (if permitted by the new pension plan rules)
- To another LIRA
- To a New LIF or RRSP upon retirement
- To buy a life annuity
They’re both designed for retirement savings. A LIRA holds pension assets and keeps them locked-in until a specific age, whereas an RRSP holds money that you contributed to and can withdraw at anytime. Keep in mind, you’ll be taxed on any withdrawals you make from an RRSP and a LIRA.
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