Last updated: August 31, 2022
What is a LIRA?
A locked-in retirement account (LIRA) is a Canadian registered account designed to hold and invest pension assets that you and your former employers contributed to . Investment income within the LIRA is tax-deferred – this means you won’t have to pay income tax until you withdraw funds.
Assets within a LIRA are “locked in,” which means you generally can’t make any withdrawals until you reach a specific age. The “locked in” rules of a LIRA are meant to restrict your access to your pension assets. These restrictions are similar to the ones that would’ve applied had you left the assets in your former employer’s pension plan. The specific “locked in” rules are determined by applicable federal, provincial, and territorial pension legislation.
Leaving your employer with a pension plan
Let’s say you have a pension plan with your employer. When you leave your job , you’d have to decide what to do with this pension. Depending on your specific situation and terms of the plan, you may have three options:
- leave your pension assets where they are,
- purchase a payout annuity, or
- transfer your pension assets into a locked-in account like a LIRA.
Benefits of a LIRA
Saving for retirement
The funds within a LIRA are locked-in until you’ve reached the minimum age prescribed by pension law. This means you can’t dip into your savings early. This allows you to keep more of your money for your retirement years.
Customize your portfolio
With a LIRA, you can diversify and build a portfolio by investing in stocks, mutual funds, GICs, etc. A diversified portfolio can help reduce risk and may lead to a higher return.
LIRA withdrawal rules
Taking money out of your LIRA
In some provinces, you may “unlock” up to 50% of your LIRA at age 55 . At this point, depending on your jurisdiction, you have a few options such as transferring your funds directly into another registered account or buying a life annuity. Remember, funds in registered accounts and life annuities are tax-sheltered. This means you won’t be taxed until you make withdrawals or receive payments.
Special exceptions for early LIRA withdrawals
There are special exceptions that allow withdrawals at any age. These exceptions may apply to you if you find yourself in one of these circumstances:
you’re facing financial hardships (such as being unable to make rent or mortgage payments or having a high amount of medical expenses),
- you’re no longer a resident of Canada,
- you have a reduced life expectancy, or
- you have a small amount of assets in your LIRA.
Please note you may need your spouse or common-law partner’s consent in order to make early LIRA withdrawals related to a special exception.
Additional information
Keep in mind that LIRA rules relating to withdrawals depend on applicable pension legislation. Check the applicable government’s website to learn more about pension savings and locked-in accounts. Or, connect with an advisor for more detailed information.
Frequently Asked Questions
Can I contribute to a LIRA?
No, you can’t make cash contributions to a LIRA. A LIRA is designed for holding pension assets that you and your former employer contributed to.
What’s the difference between a LIRA and an RRSP?
They’re both designed for retirement savings. A LIRA holds pension assets and keeps them locked-in until a specific age, whereas an RRSP holds money that you contributed to and cana withdraw at anytime. Keep in mind, you’ll be taxed on any withdrawals you make from an RRSP and a LIRA. Learn more about the differences between a LIRA and an RRSP
What happens to a LIRA when you turn age 65?
You don’t have to make any changes to your LIRA at age 65. You can keep your assets in a LIRA until the end of the year you turn 71. Then, you must decide whether to purchase a life annuity or convert your LIRA to a Life Income Fund (LIF).
Can I transfer my LIRA to an RRSP?
Generally no, you can't transfer a LIRA to an RRSP unless you meet specific unlocking conditions
What happens to my LIRA when I die?
Generally, the funds go to your spouse or common-law partner. Pension legislation requires your spouse or common-law partner to be your beneficiary unless they give up this right. If you don’t have a spouse or a common-law partner, then the funds in the LIRA can be paid to another beneficiary – this is provided the legislation allows you to designate a beneficiary.
Connect with an advisor for more detailed information on your specific situation