We’re all familiar with the RRSP and the TFSA, but they’re not the only registered account out there 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.
Having a LIRA is a good thing: 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.
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 is choosing to instead 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.
You don’t get to choose to invest it into an unlocked account, unless the pension is tiny. In other words, you can’t move that money into an RRSP.
While LIRAs and RRSPs share many characteristics, they do come with their own set of rules. Here is what you need to know.
The biggest difference between an RRSP and a LIRA is that the latter is locked. You can’t make any more contributions, and there are strict rules around withdrawing money. These accounts have two important similarities, though: You have to pay tax on the funds in your LIRA when you withdraw, and you can decide how you’d like to invest the money that’s in one, says Sigurdson.
Wait to withdraw
In the same way that an RRSP turns into a Registered Retirement Income Fund 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. Still, you will need to turn your LIRA into a LIF by the end of the year you turn 71.
Like a RRIF, you’ll have to withdraw a certain minimum amount from a LIF every year – it’s based on your age and the value of the account – but 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 Sigurdson. “This money was once part of a workplace pension, and the government wants to make sure such funds are used properly.”
Retirees don’t always have to convert their funds into a LIF: They can also decide to take the money in their LIRA and buy a life annuity contract, which will provide them with fixed payments for the rest of their life.
Exceptions to the 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, if the account balance falls below a certain threshold, if you become a non-resident of Canada, or if you can prove financial hardship. “In some jurisdictions only, when you convert your LIRA to a retirement income plan, you can transfer half that money into an RRSP,” says Sigurdson. Your advisor can help you understand these rules and make sure you stay compliant.
Incorporate it into a plan
Having a LIRA is a good thing: 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 tax-assisted savings,” says Sigurdson.
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.