Meet LIRA, the Lesser-Known Retirement Savings Plan

There’s more to Canadian savings accounts than the RRSP and the TFSA.

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“People think of RRSPs and LIRAs as being completely different – they’re not.”

 

We’re all familiar with the RRSP, but it’s not the only retirement account out there. Many Canadians have what’s called a Locked-In Retirement Account (LIRA). Don’t worry if you haven’t heard of it, it’s much less popular than the RRSP and many of those who have one don’t even know it. So, what is a LIRA? We asked David Ablett, Director, Tax & Estate Planning at Investors Group to explain.

David Ablett
B.Comm (Hons), is Director of Tax and Estate Planning with Investors Group

  • What exactly is a LIRA and who has one?

    People think of RRSPs and LIRAs as being completely different – they’re not. The LIRA is a special type of RRSP that’s established with the sole purpose of holding locked-in monies from a pension plan until a person is ready – or eligible – to start receiving pension payments. So, when a person leaves their employer and is either too young to start receiving pension benefits or is choosing not to receive them yet, they transfer the value of their pension plan into a LIRA.

  • How is it different from an RRSP?

    With both accounts, you pay tax when you withdraw the money. What makes them different is that a LIRA is established to hold the money until retirement and has strict guidelines about how and when a person can access it. In the case of an RRSP, there are no rules around when someone can take the money out.

  • If someone has a LIRA, do they still need an RRSP?

    Yes. The LIRA may have only covered a certain number of years in your working life so people should have an RRSP to generate additional tax-assisted savings. You can’t contribute to a LIRA like you can an RRSP.

  • What should people who have LIRAs know about the account?

    People need to understand the withdrawal restrictions. In most provinces, the minimum age to remove money is 55 and you can keep the account open as late as the end of your 71st year.

     

    That being said, Canadians don’t actually receive benefits directly from their LIRA. They have to transfer the funds into something called a Life Income Fund (LIF). There are different types of LIFs but, generally, a LIF has a maximum amount that you can take out every year, which is imposed by provincial legislation. The reason LIFs have a maximum payment amount is to ensure you’ll have money in there for your lifetime.

     

    The annual maximum amount is based on your age and the value of the LIF. Thus, your income from the LIF will be dependent on the investment performance of your account. An alternative to the LIF is to use the LIRA assets to purchase a life annuity contract, which will provide you with a fixed amount for the rest of your life.

  • Is there any way to take money out of a LIRA other than converting to a LIF?

    While not the norm, there are special circumstances where it could be possible to take money out of a LIRA, depending on jurisdictions. For example, you may be able to withdraw early if your LIRA is small, if you can prove that you have a shortened life expectancy, if you’re in financial hardship, such as losing your job and have absolutely no access to other money and, in some jurisdictions only, when you convert your LIRA to a retirement income plan, you can transfer half that money into an RRSP. As always, it’s a good idea to talk to your financial advisor about your LIRA before withdrawing.

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