How’s a LIRA different from an RRSP? Can I take money out? Can I transfer my LIRA to an RRSP? Randy answers the most common questions we hear about Locked-In Retirement Accounts.
Whether you’re leaving a job with a pension or already have a LIRA, here’s a helpful list of FAQs!
It’s hard to imagine that just a few decades ago, it was normal to get a job right out of school and stay with the same company until you retired, probably with a cushy pension. While that might have been the norm for our parents, we’ll likely have a handful of different jobs. Maybe we’ll join a new company or switch careers altogether, who knows!
All this job switching means we’re starting to see more and more people leave employers where they had a pension. Now they have a pension, maybe even multiple pensions from different companies, that need to be invested until retirement. That’s where the Locked-In Retirement Account (LIRA) comes in.
Now that LIRAs are becoming more common, it’s important we understand the basics of how they work and why they’re different than RRSPs. So, whether you’re leaving a job with a pension or already have a LIRA you might want to move, here’s a helpful list of FAQs!
Let’s start with the obvious, what’s a LIRA?
Think of a LIRA as money that comes from a pension plan. When you leave a company where you have a pension—doesn’t matter if you’re leaving by choice or if you were laid off—that money is transferred to a LIRA, which stands for Locked-In Retirement Account. In some provinces, it’s called a Locked-In RRSP.
It’s similar to an RRSP but with a few important differences—for example you can’t contribute to it or withdraw money from it. Like the name would suggest, that money is locked-in there until you retire.
Just like an RRSP, a LIRA is a tax-sheltered basket that holds investments (equities, ETFs, bonds, stocks, mutual funds, etc.) and you pay income tax on withdrawals in retirement.
Can I contribute money to my LIRA?
No. Once your pension is converted to a LIRA you can’t make any more contributions.
Can I take money out?
Nope. Unlike the RRSP which you can withdraw money from (although you’ll pay a hefty withholding tax, so it’s definitely not an account you should be raiding every time you want to go on vacation…) you can’t withdraw money from a LIRA. Like we said, think of that money as locked-in there—nothing in or out until you retire.
Remember, the whole purpose of a pension is to provide you with income in retirement. If you leave your employer before retirement for whatever reason, the purpose of that money stays the same. That’s why those funds are ‘locked-in’ an investment account. You can’t just withdraw the money today to buy that boat you’ve been eyeing… you’ll have to wait, sorry. But by the time you do retire compound interest will have worked its magic, and you’ll have enough for a yacht!
When you think about it this way, you can see it’s probably for the best you can’t touch that money. Jonathan Chevreau wrote a great article about this called think of a LIRA as a less flexible RRSP that has your best interests at heart.
Alright, that does sound pretty good, but what if an emergency comes up and I really need that money? Are there any exceptions?
Depending on the jurisdiction your pension is registered in (federally or in a specific province), there might be exceptions that allow you to access money in your LIRA. Exceptions can include reduced life expectancy due to terminal illness, long-term unemployment, or facing foreclosure on your mortgage. You also might be able to withdraw the money if you have a low balance. You’ll have to ask your pension administrator and look at your provincial pension rules to know for sure.
Can I move the money in my pension, or my existing LIRA, to an RRSP?
No. This is a question we get asked a lot and it’s important to understand why you can’t. Although the LIRA and RRSP are similar in many ways, they are ultimately different accounts with different rules. Remember, you can’t contribute to or withdraw money from a LIRA like you can from an RRSP. Because of this, the government won’t let you transfer your LIRA to an RRSP.
What happens to my LIRA when I retire?
When you retire your LIRA must be converted to a Life Income Fund (LIF) or a Locked-In Retirement Income Fund (LRIF). Or you can use the money to purchase a life annuity. Withdrawals are taxable income, just like money you take out of your RRIF.
Converting to a LIF or LRIF allows you to control the investments in your account, and withdrawals will be subject to minimum and maximum annual amounts. The minimum annual withdrawals are the same as the RRIF. This table shows the LIF minimum and maximum withdrawal limits for 2017. A life annuity would provide you with guaranteed regular payments for life.
Which option you choose depends on a host of personal factors. As always, we’d recommend seeking out the help of a trusted financial planner if you want help deciding which option is best for you.
When can I convert my LIRA to a LIF or LRIF and start taking money out? Are there any age restrictions I should know about?
It depends on the jurisdiction your account is registered in, but in general, the earliest you can convert your LIRA to a LIF or LRIF is at age 55. This is another important difference between the LIRA and RRSP.
The latest you can convert your LIRA is the calendar year in which you turn 71. Which is the same as your RRSP.
Can I transfer my LIRA from one province to another?
In general, no. If your LIRA is registered provincially it’s subject to the rules and regulations of that province. Since every province has slightly different rules, your LIRA can’t be transferred to or combined with a locked-in account in another province.
Here’s an example… A client of ours left their job in Alberta, where they had a pension, and moved to Ontario. They wanted to transfer their LIRA to us, and because they are now living in Ontario they assumed they should be opening an Ontario LIRA. However their LIRA has to stay registered in Alberta, so they actually needed to open an Alberta LIRA with us. Which is no problem, we just need to make sure we’re filling out the right form to open the account.
Can I move my LIRA to a different financial institution?
Yes! No problem. As we explained in the example above, your new financial institution will need to know where your account is registered in so they open the right account for you.
How do I find out where my LIRA is registered?
If you’re unsure if your LIRA is registered federally or provincially, or in what province, ask your pension plan administrator. If you don’t know who that is, ask your previous employer and they’ll be able to give you the details.