Most of us are familiar with RRSPs and TFSAs, but they’re not the only registered accounts available for retirement savings. Many Canadians have what’s called a locked-in retirement account (LIRA). It’s such an under-the-radar investment vehicle, that some LIRA holders may not even know they have one.
Think of the LIRA as a special kind of RRSP, though people can’t set one up with just any money. It’s created when someone leaves their employer and decides to invest the commuted value of their pension with a financial institution. Those funds get transferred into one of these accounts.
“When a person leaves their employer and is either too young to start receiving pension benefits or chooses instead to receive the pension’s commuted value, they transfer the value of their pension plan into a LIRA,” says Todd Sigurdson, Director, Tax and Estate Planning at IG Wealth Management.
Can a LIRA be transferred to an RRSP?
You can’t transfer the money to an unlocked account, unless the pension amount is tiny, so no, LIRA transfers to RRSPs are not allowed.
While LIRAs and RRSPs share many characteristics, LIRA withdrawal rules are somewhat different. Here is what you need to know.
What is a LIRA compared to an RRSP?
The biggest difference between an RRSP and a LIRA is that the latter is locked, meaning you can’t make any more contributions. There are also strict rules around withdrawing money. These accounts have two important similarities, though: you have to pay tax on the funds in both your LIRA and RRSP when you withdraw them, and you can decide how to invest the money that it contains.
Some people get confused about a LIRA vs a locked-in RRSP, but the terms are interchangeable.
LIRA withdrawal rules
In the same way that an RRSP turns into a Registered Retirement Income Fund (RRIF) at the end of the year you turn 71, a LIRA can be converted into a Life Income Fund (LIF). An RRSP can be converted to a RRIF at any time before age 71, but the earliest age at which a LIRA can be converted to a LIF depends on the province you lived in at the time you left your employer. Either way, you will need to turn your LIRA into a LIF by the end of the year you turn 71.
Can a LIRA be transferred to an RRSP?
Investments within LIRAs can only be transferred to a LIF or an annuity, so LIRAs cannot be transferred to an RRSP.
What is a LIRA’s minimum withdrawal amount?
As with a RRIF, LIRA withdrawal rules state that you’ll have to withdraw a certain minimum amount from your LIF every year, which is based on your age and the value of the account. And these accounts also come with a maximum withdrawal limit.
“The reason LIFs have a maximum payment amount is to ensure you’ll have money in there for your lifetime,” says Todd. “This money was once part of a workplace pension, and the government wants to make sure such funds are used properly.”
Retirees don’t have to convert their funds into a LIF. They have the option to transfer the money in their LIRA over to an annuity, which will provide them with fixed payments for the rest of their life.
Exceptions to the LIRA rules
While your funds are supposed to be locked in, there are some exceptions. Depending on the pension legislation applicable to your account, you may be able to remove money early if:
- You have a shortened life expectancy
- The account balance falls below a certain threshold
- You become a non-resident of Canada
- You can prove financial hardship
“In certain jurisdictions, when you convert your LIRA to a retirement income plan, you can transfer half of that money into an RRSP,” says Todd. Your advisor can help you understand these rules and make sure you stay compliant.
Can I use my LIRA for a down payment on a house?
Unfortunately not. LIRA withdrawal rules state that it does not act like an RRSP, which does allow you to withdraw up to $35,000 of your savings for a down payment on a home, as part of the Home Buyers’ Plan. Nor can you use the money from a LIRA to fund your education, as you can with an RRSP and the Lifelong Learning Plan.
What is a LIRA’s benefit to your financial plan?
A LIRA is a good investment to have in your financial plan: it means you have additional retirement savings that you can use in your later years. But it likely won’t be enough to fund your entire retirement. “The LIRA may only represent pension benefits from a certain number of years of your working life, so people should also have an RRSP and TFSA to generate additional retirement income,” says Todd.
Consult with your advisor to help you better understand the rules around your LIRA and to make sure it’s being accounted for in your retirement plan. If you don’t have an advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.