A Locked-In Retirement Account (LIRA) is a government-registered account for Canadians under 71 years old who left a job that was providing them with a pension.
If you find yourself in that situation, you may be given the option of keeping your pension where it is (with the employer) or transferring it to a LIRA. Funds grow tax-deferred in a LIRA, but are locked in and can only be withdrawn at retirement or in specific circumstances.
Let’s take a closer look at what to expect when opening, maintaining, and withdrawing from a LIRA in Canada.
Key Takeaways
- Transfer your pension plan into a LIRA when you leave a job.
- Funds are held in a LIRA tax-free.
- You can’t make contributions to a LIRA after you’ve transferred them.
- Convert your funds into a retirement account or annuity when you retire.
- Rules for LIRAs vary by province.
How does a LIRA work?
LIRAs can be an option if you leave an employer and want to transfer your pension funds to a financial institution. If you go this route, you can keep the money in a tax-sheltered retirement fund that’s under your control.
LIRA accounts can be professionally managed, or you can open one yourself from most of the major banks and investment brokers in Canada, like a self-directed Questrade LIRA.
Similar to an RRSP, funds in a LIRA can be invested and grow tax-free until retirement. Unlike an RRSP, once you’ve transferred your pension funds into a LIRA, you cannot make additional contributions.
When you retire, you can convert your LIRA to a pension fund or annuity and withdraw it for retirement income.
Most of the regulations around LIRAs are set at a provincial level, so it’s recommended to speak with a financial advisor to figure out what you need to keep in mind.
How taxes work with a LIRA
A LIRA account has very similar tax rules as an RRSP.
That means your money will be able to grow tax free within the account, but your withdrawals in retirement will be taxed at your income tax bracket.
The major difference is the money you transfer from your company plan to your LIRA isn’t tax deductible, which means you won’t score some nice savings on your tax return that year.
Withdrawing from your LIRA
Though all that money sitting in your LIRA may look tempting, there are very few instances where you can get access to your funds before retirement.
For example, some provinces will let you withdraw from your LIRA early if:
- you have a reduced life expectancy,
- you’re unemployed or have low income,
- you become a non-resident of Canada, or
- your LIRA is below a certain amount.
If some of the above situations sound like you, get in touch with a financial advisor to go over your specific province’s rules and regulations.
Entering retirement with a LIRA
Once you retire, the next step is to transfer your LIRA funds into a retirement income account or annuity better suited for withdrawals.
Some examples include:
- a life annuity,
- a Life Income Fund (LIF), and
- a Locked-in Retirement Fund (LRIF).
These accounts will give you access to your funds, sometimes paying out a certain amount of money on an ongoing basis (usually monthly), providing you with income during retirement. There will often be a minimum and maximum to the withdrawals you’re allowed to make on a yearly basis.
Some provinces may allow you to unlock a portion of your LIRA as early as age 55. But keep in mind that once you hit age 71, you’re required to start withdrawing money from your LIRA.
LIRA vs. RRSP
So how does a LIRA compare to other retirement accounts in Canada you may be more familiar with? Let’s take a look at one of the most popular options – the RRSP.
| Type of account | Taxes | Withdrawals | Contributions |
|---|---|---|---|
| LIRA | * Grow money tax free * Not tax deductible |
* Pay tax on withdrawals * Can withdraw early in exceptional circumstances |
* Can’t make contributions |
| RRSP | * Grow money tax free * RRSP contributions are tax deductible |
* Pay tax on withdrawals * Special circumstances when you can withdraw early (first time you buy a home and to pay for education) * Must pay back early withdrawals within specific time frame |
* Can make contributions up to a certain amount each year |
An RRSP is one of the most popular retirement plans available in Canada. One of the biggest perks is that your money is tax-deductible when you make a deposit, and then grows tax free within the account.
In the case of a LIRA, you can’t deduct your contributions from your income tax, but your money will grow tax free.
When it comes time to withdraw from an RRSP during retirement, you’ll have to pay tax at your current income tax bracket. This is also the case with a LIRA.
Similar to how LIRA has some specific circumstances where you can withdraw your money, an RRSP does have 2 options to access your money before you retire: the first time you buy a house and to pay for additional education.
If you take advantage of these RRSP withdrawal options, you’ll have to pay back the money within a certain amount of time. A LIRA has no such requirement.
Is a LIRA right for you?
If you’re leaving a job with a pension plan, do you think you’ll transfer your funds to a LIRA?
Or, have you transferred a pension into a LIRA? How did the process go for you?
Let us know in the comments below.
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What is a LIRA?
A LIRA is a government-registered account that provides a tax-sheltered place to transfer your existing pension plan to when you change jobs. When you retire or turn 71, you’ll then transfer your funds from the LIRA to a retirement fund or annuity.
Who is eligible for a LIRA?
If you’re under 71 years old and are leaving a company that was providing you with a pension plan, you may be eligible to transfer your funds to a LIRA. Because most pensions are regulated on a provincial basis, speak to a financial advisor to see what options you have.
When can I withdraw from a LIRA account?
The funds in a LIRA must be transferred to another account during retirement in order to start withdrawing funds. There are a handful of special circumstances where you can withdraw from your LIRA early, but these are regulated on a provincial basis.
Can a LIRA be transferred to a RRSP?
In some cases, you may be able to transfer your LIRA to an RRSP. Speak with a financial advisor to see the rules that apply to your specific LIRA in your province.
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