If you’ve been wondering, “What is a LIRA?” we’re here to help—it’s a Locked-In Retirement Account (LIRA). This refers to a government-registered account for people under 71 who previously had a job that came with a pension.
If you’re under 71 and have a qualifying account, you might be able to leave your pension with your employer or move it over to a LIRA, where the money can grow tax-deferred. The tradeoff is that the funds are locked in, so you can only withdraw them when you retire (or in qualifying circumstances).
We’ll answer more of your questions about opening and withdrawing from a LIRA, so you understand how to manage the account.
Key Takeaways
- Transfer your pension plan into a LIRA when you leave a job.
- Funds are held in a LIRA tax-free, but you’ll pay taxes on the money when you withdraw it.
- You can’t make contributions to a LIRA after you’ve transferred the funds.
- 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 a Registered Retirement Savings Plan (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 you should speak with a financial advisor to learn more.
How taxes work with a LIRA
A LIRA account has very similar tax rules as a 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 that 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
- Your LIRA is below a certain amount
If any of the above situations sound like they apply to 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)
- 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.
Just as a LIRA has specific circumstances where you can withdraw your money, an RRSP provides 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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FAQ
What is a LIRA?
A LIRA is a locked-in retirement account that gives you a place to transfer your existing pension plan, where the funds can grow tax-deferred. You’ll be required to withdraw funds when you retire or turn 71.
What is the difference between a LIRA and an RRSP?
One of the biggest differences is that you can continue to fund an RRSP, which is also tax-deferred, but you can’t contribute funds to a LIRA once you open the account and transfer your pension.
Can you take money out of a LIRA?
You can withdraw funds at retirement or when you turn 71, but also in specific situations that vary by province. For instance, you may be able to withdraw funds due to financial hardship or to pay medical bills.
What is the best thing to do with a LIRA?
The best thing you can do is transfer your pension funds from your employer into a LIRA, so you have access to the money even if your employer goes out of business. You can also control your investments.
How is a LIRA paid out?
When you retire or turn 71, you’ll need to transfer your LIRA funds to a life annuity, life income fund (LIF), or locked-in retirement fund (LRIF). Then, you can set up withdrawals from these accounts.
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