What is a Locked-In Retirement Account?
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Discover the methodologyIf you’ve recently left your job and are wondering what to do with your accumulated pension savings, you may have heard of Locked-in Retirement Accounts.
While the name sounds a bit ominous - are you sending your pension to prison? - these accounts can provide you with valuable peace of mind and play an important role in your retirement planning.
In this guide, we’ll discuss the pros and cons of “locking in” your pension funds until you need them, as well as the particulars of these unique savings accounts.
What is a Locked-In Retirement Account?
A “locked-in retirement account” - better known as a LIRA - is a type of Registered Retirement Savings Plan (RRSP) designed to hold funds rolled over from a pension plan.
Amounts deposited into a LIRA are held until the account holder reaches retirement age and cannot be withdrawn before that time except under very specific circumstances. You’re also not permitted to make any additional deposits.
Once you reach retirement age, you’ll need to convert your LIRA to a Life Income Fund (LIF) to begin making withdrawals or use the money to purchase a life annuity from an insurance company.
You can choose to leave your funds in a LIRA beyond the retirement age set by your province, however, Locked-In Retirement Account rules require that you transfer them to a new account by the end of the year in which you turn 71.
How does a LIRA work?
Practically speaking, a LIRA works in much the same way as a pension or registered retirement savings plan. Once you’ve transferred your retirement savings away from an employer-backed pension plan, your money will continue to grow, tax-free, until you reach retirement age.
LIRA accounts also exist to safeguard retirement savings when the initial beneficiary of a pension plan no longer needs or has an entitlement to the funds.
Let’s take a look at a few examples to understand when a LIRA might be used:
David has been working for the same employer for ten years and making regular contributions to a Defined Contribution Benefit Plan (DCBP). He recently found a new job and has decided to roll over his accumulated savings into a LIRA rather than continue with his previous company’s pension.
Camille and Nicole have decided to part ways after fifteen years of marriage. As part of the divorce settlement, Nicole receives a portion of a DCBP account in Camille’s name and rolls them over into a LIRA that she manages herself.
Rachel’s mother passes away unexpectedly at the age of 41. As part of her inheritance, Rachel is entitled to her mother’s pension. Until she’s of age to begin drawing the pension herself, Rachel can continue to grow the funds in a tax-free LIRA.
Most banks and other major financial institutions will allow you to open a LIRA, and many offer the option to manage it on your behalf. If, however, you prefer to control any investment activity yourself or hire an independent financial advisor, that’s also an option.
Once you’ve rolled over your retirement savings into a LIRA, your money remains “locked-in” until you reach retirement age. Because LIRAs are governed by provincial pension legislation, you’ll need to review the law in your province to know precisely when you’ll be able to access the funds.
Many provinces will allow you to partially unlock your LIRA starting from age 55, however, you won’t be able to make a lump-sum withdrawal.
When you decide to retire, you’ll need to convert your LIRA to a LIF to begin making regular withdrawals. Alternatively, you can use the money in a LIRA to purchase a life annuity insurance policy.
What are the advantages of a LIRA?
While LIRA accounts aren’t required - you can always leave your savings in an existing pension plan - many people appreciate the option to manage their investments personally.
- Rolling your retirement savings into a LIRA also ensures that you won’t lose your investment if your former employer goes out of business.
- Money stored in a LIRA will continue to grow tax-free for the life of the account.
- “Locking in” your retirement savings can prevent impulsive spending before you need the income.
What are the disadvantages of a LIRA?
While most RRSPs will allow you to make withdrawals before retirement provided you promise to repay your contributions on a set schedule, LIRA funds - true to the name - are (almost) completely out of reach until you need them for post-employment income.
- You also can’t add new funds to a LIRA after rolling over your pension, which means you’ll potentially need to manage multiple retirement savings accounts.
- Some financial institutions charge hefty fees to manage a LIRA, so be sure to compare service charges and other costs before committing.
- Because the rules governing LIRAs vary from province to province and pension type to pension type, understanding when, exactly, you’ll access your savings can get tricky. This, in turn, may complicate future financial planning.
When can you withdraw from a LIRA?
The age at which you become eligible to unlock a LIRA varies depending on the provincial legislation governing the pension to which you originally contributed. In other words, the process of unlocking a LIRA in Ontario will likely have different requirements than the process of unlocking a LIRA in Alberta.
Need access to your money before retirement age? Most provincial LIRA unlocking rules allow you to withdraw up to 50% of the value of a LIRA beginning at age 55 - 50, in Alberta. To access the full amount, however, you’ll need to wait until the official retirement age set by your province and your previous pension.
Most provinces will allow you to withdraw money from a LIRA before retirement if you find yourself facing particular challenges:
- You suddenly incur significant medical or disability expenses
- You are facing foreclosure on your home or eviction from a rental
- You become terminally ill and require end-of-life support
You are also eligible to withdraw money saved in a LIRA before retirement if you decide to permanently leave the country.
In short, rules governing unlocking a LIRA will vary widely, so it's best to consult a financial advisor to make the most of the savings in your LIRA.
How do you withdraw money from a LIRA?
Unlocking a LIRA and withdrawing funds looks a bit different than a standard savings account. Technically, you won’t withdraw money from a LIRA in the sense of receiving regular payouts.
Instead, you’ll transfer the value of your LIRA to a new account, usually a Life Income Fund (LIF) or another Registered Retirement Savings Plan (RRSP), from which you’ll make scheduled withdrawals at specific rates set by your province.
You can also use the money saved in your LIRA to purchase a special insurance policy called a life annuity. This is a special type of insurance policy that provides guaranteed monthly payouts for life.
Most provinces permit a one-time LIRA unlocking at the age of 55, even if you don’t intend to retire. This LIRA account withdrawal can be up to 50% of the total value of the account.
The catch? The money you withdraw can only be transferred into a LIF, an RRSP, or if you live in Labrador or Newfoundland, a Locked-in Retirement Income Fund (LIRF).
After consulting with a certified financial planner, Linda decides that she would like to invest more aggressively to maximize her potential retirement income. Linda is 55, so she requests a one-time transfer of 50% of the value of her LIRA to a LIF managed by her bank with a broader portfolio and higher risk profile.
In the case of married couples, spouses have the right to transfer the assets held in a LIRA to a new RRSP or LIFs should one die before the other.
Frank’s husband, James, passes away unexpectedly at the age of 52. As the surviving partner, Frank is entitled to transfer the savings in James’ LIRA to a new locked-in retirement savings scheme held in Frank’s name.
The specific procedure you’ll follow to release funds from your LIRA depends on the pension legislation for your province. That means unlocking a LIRA in Ontario might look slightly different than unlocking a LIRA in Alberta. When in doubt, check with your financial institution for guidance.
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What happens to a LIRA when you retire?
Once you reach retirement or, at the absolute latest, the age of 71, you’ll need to convert your LIRA into a new form to begin making regular withdrawals:
LIF - Life Income Fund
A Life Income Fund (LIF) allows you to manage your investments independently but has specific rules governing withdrawals. On the one hand, you must withdraw a certain minimum amount annually. On the other, your withdrawals cannot exceed a certain amount. These minimum and maximum rates are calculated annually and will vary based on where you live and how old you are.
These minimum and maximum withdrawal rates work together to ensure that you receive a reliable income for the entirety of your retirement and that you’re using this tax-free fund for its intended purpose.
Regulations governing LIFs also require you to use the funds to purchase a life annuity once you reach the age of 80.
LRIF - Locked-in Retirement Income Fund
Residents of Newfoundland and Labrador have the option to convert a LIRA into a Locked-in Retirement Income Fund (LRIF). In all other provinces, the LIF has replaced this account type.
Like the LIF, withdrawals from an LRIF must follow certain minimum and maximum rates set each year by the Canadian Revenue Agency. While minimum rates will usually be the same as those for a LIF, the maximum withdrawals allowed for an LRIF can be higher.
Unlike a LIF, you are not required to use the funds stored in an LRIF to purchase a life annuity once you turn 80.
What are the minimum LIF withdrawal rates?
While you’re required to withdraw a certain amount from your LIF annually, understanding just how much depends on a few things, such as the province in which you live, your age and the year in which you intend to make the withdrawal.
The minimum and maximum LIF withdrawal rates will also change annually based on a formula set out in the Tax Act.
For clarity on your particular withdrawal rates, we suggest consulting with a certified financial planner or tax professional to understand the best course of action for your planned retirement.
What are the maximum LIF withdrawal rates?
The maximum withdrawal rate for a LIF changes every year based on a formula set out in the Tax Act. Other factors, including your age and where you live, however, also have an impact, so it’s best to consult a professional financial advisor or planner.
Remember, you’re required by the Tax Act to make a minimum withdrawal from your LIF every year. You cannot withdraw a lump sum, however, except under special circumstances, such as terminal illness.
Locked-in Retirement Accounts vs Registered Retirement Savings Plans
At first glance, a Locked-in Retirement Account (LIRA) and a Registered Retirement Savings Plan (RRSP) look very similar. Both are designed to help Canadians plan for a secure retirement by allowing savings to grow tax-free over an extended period.
Look a bit more closely, however, and you’ll notice some important distinctions.
LIRA - Locked-in Retirement Account
- Opened when you leave a former employer and need to roll over your pension savings to a new account.
- A one-time deposit of rolled-over pension funds. No further contributions are allowed.
- Money deposited grows tax-free.
- Funds are unavailable until age 55, with exceptions for urgent circumstances.
- Funds remain entirely secure until retirement when you need them.
RRSP - Registered Retirement Savings Plan
- Opened by you at any time with a participating financial institution.
- Ongoing deposits are allowed up to a certain annual maximum.
- Money deposited grows tax-free.
- Funds can be withdrawn prior to retirement to purchase a home or pay for full-time study
- Possibility of employer-matching contributions.
For most Canadians, planning for a secure retirement will involve multiple types of savings and investment accounts. In many cases, a combination of accounts, such as a LIRA and an RRSP, provide the necessary
Good to know
To learn more about the benefits of an RRSP, have a look at our guide.
Can I use my LIRA for a downpayment on a house?
No, LIRA withdrawal rules do not allow you to remove money from the account to make a downpayment on a house.
Until you reach retirement age, any funds rolled over into a locked-in retirement account are just that: locked in. Withdrawals for reasons other than retirement income are not permitted except under urgent circumstances, such as:
- To pay for unforeseen medical or disability expenses
- To prevent foreclosure or eviction
- To pay for end-of-life care in the case of terminal illness
For advice on setting up a LIRA or unlocking an existing one
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