A Locked-In Retirement Account, or LIRA, is a registered account that accumulates pension money outside of a company pension plan.
As many Canadians change jobs several times over the course of their career, a LIRA allows for pension funds to be transferred once an individual is no longer employed by their company.
As the name suggests, the contributions you made to your pension plan are “locked-in” once they are transferred out of the company and into a LIRA, meaning they cannot be accessed until retirement age.
Self-Directed + Low Fees: Questrade
For those who want to self-direct how their funds are invested, opening up a LIRA account at a discount brokerage is probably the best combination of paying low commissions and maintaining 100% control on where your funds are invested.
Passive + Low Fees: Wealthsimple Invest
For a more hands off or passive approach, Wealthsimple’s robo-advisor is a great choice that allows you to set your portfolio risk level and theme and then let their technology and strategies do what it’s best at. Fees are also quite reasonable.
Passive + High Interaction + High Fees: Financial Advisor
For those that prefer interfacing with a person, yet still want a hands off approach, connect with your financial advisor or a FA at one of the big banks who can help manage the funds on your behalf based on your financial preferences. Keep in mind, the fees will be the highest with this option.
How does a LIRA Account Work?
LIRAs are regulated by provincial authorities, and in general, early withdrawals are not allowed.
However, there are certain exceptions to this restriction depending on where you live.
Examples include serious illness resulting in shortened life expectancy, serious financial hardship, and moving away from Canada and becoming a non-resident.
While money put into a company pension plan is managed by your employer, LIRAs are personal accounts that can be opened at any financial institution and managed by the individual or by financial advisors.
In both situations, returns on investment can vary, and it is up to individuals to decide if they trust themselves or others to manage their money more.
Unlike an RRSP account, individuals cannot make contributions on their own into a LIRA.
However, one similarity between the two is that there is no tax on capital gains, given that both are registered accounts.
Pros of a Locked-In Retirement Account
1. Ability to manage funds yourself
For those who are savvy investors, one of the benefits of a LIRA is that investments can be self-managed.
Relying on yourself rather than a fund manager can be beneficial if you are confident in your investing abilities.
LIRAs are easy to open and can be done at either brick-and-mortar banks or through online brokerage platforms.
2. No temptations to withdraw money
For those who may be tempted to withdraw money from retirement accounts for spending, the “locked-in” aspect of LIRAs is a positive.
Not being able to take any money out can help those who have trouble with self-control.
3. Tax-sheltered growth
While there is less flexibility in what you can do with a LIRA when compared to an RRSP, they both share several key features.
Individuals are free to purchase stocks, ETFs, mutual funds, or other investments.
As your account balance grows, you can rest assured that all returns on investments will not be taxed.
4. Peace of mind at retirement
Once you reach the age of retirement, you can choose to convert your LIRA into a life annuity.
This life annuity will be there as a steady source of income, just like if you had a pension.
Cons of a Locked-In Retirement Account
1. No access to funds in case of emergency
While locking in funds can help prevent spending, it also blocks access to funds in situations when you may need money.
While provincial rules may allow for withdrawal in special circumstances, there is no guarantee that money will be available when you need it the most.
2. Rules vary by jurisdiction
Given the plans are regulated provincially, it may be more difficult to nail down some specific details.
This is especially a concern if you move or work for employers in provinces other than the one you live in.
3. Can’t make regular contributions
LIRAs are not great savings vehicles as additional contributions cannot be made regularly like an RRSP.
This can make it harder to plan ahead towards retirement.
4. Can’t be used for the Home Buyers or Lifelong Learning Plan
Many choose to take money out of their RRSP to buy a home or go back to school through the Home Buyers or Lifelong Learning Plan.
RRSPs are set up to allow for tax-free withdrawals for these situations, provided that money is returned into the account within a set number of years.
This option is not available for LIRAs.
How does a LIRA Compare to Other Retirement Account Types?
As mentioned, LIRAs share many similarities with RRSPs.
Both are designed to incentivize saving for retirement.
As registered accounts, both LIRAs and RRSPs offer tax benefits and can be leveraged during the high-earning years of your career.
One of the main differences between the two is the flexibility that RRSPs offer.
While LIRAs have strict rules related to how and when money can be deposited and withdrawn, RRSPs offer much more freedom.
Aside from yearly contribution limits, there are no real rules as to how and when you can deposit money.
Withdrawing is also flexible, although taking money out during later years when you are retired with lower yearly income is usually the best idea.
Another similar account is the Locked-in Retirement Savings Plan.
This account actually functions the exact same as a LIRA.
The names differ because LRSPs are subject to federal legislation, while LIRAs are subject to provincial rules.
Depending on your employer, pension funds will go into either a LIRA or an LRSP after leaving a company.
Frequently Asked Questions
- What happens to a LIRA when you turn 71?
At 71, the law states that a LIRA must be converted into either a Life Income Fund or a life annuity. A life annuity acts similar to a pension, providing a stable income stream through regular payments. On the other hand, a life income fund is more flexible, only requiring that the individual withdraws a minimum amount from their account each year. Other than that minimum withdrawal amount, the remainder of the money remains in your account, allowing you the freedom to invest as you see fit.
- Can I transfer my LIRA to an RRSP?
Yes, but only up to a certain percentage and only in specific provinces (e.g. Alberta and Ontario)
- What are the LIRA withdrawal rules?
As LIRAs are regulated at the provincial level, withdrawal rules differ depending on where you live. In general, circumstances where financial situations change and an individual needs to access money to pay for basic expenses can sometimes allow for withdrawals from a LIRA.