Key Takeaways
- Holds locked-in pension funds from former employers.
- No personal contributions; funds are tax-deferred.
- Withdrawals restricted until retirement or specific conditions.
- Must convert to income fund by age 71.
What is Locked-In Retirement Account (LIRA)?
A Locked-In Retirement Account (LIRA) is a Canadian registered investment vehicle designed to hold pension funds transferred from a registered pension plan (RPP) when you leave an employer or in other specific situations. These accounts preserve your pension benefits by restricting withdrawals until retirement, ensuring your savings remain locked in for income later in life.
Unlike a regular RRSP, a LIRA prohibits additional personal contributions and enforces government-mandated restrictions on accessing funds early.
Key Characteristics
Understanding the defining features of a LIRA helps you manage your retirement funds effectively.
- Locked-In Funds: Money transferred into a LIRA must remain locked in until you reach a specified retirement age, except in limited cases such as shortened life expectancy or non-residency.
- No New Contributions: You cannot add personal funds to a LIRA; it only accepts transfers from registered pension plans.
- Tax-Deferred Growth: Investments grow tax-free inside the account until withdrawal, similar to an RRSP.
- Conversion Requirement: By age 71, you must convert your LIRA into a retirement income vehicle, such as a Life Income Fund (LIF) or an annuity, depending on jurisdiction.
- Provincial Variations: Rules and withdrawal options differ by province or territory, reflecting the legislation governing the original pension plan.
How It Works
When you leave a job, your vested pension benefits can be transferred into a LIRA to maintain control over your retirement savings. This transfer is tax-deferred and allows your funds to continue growing until you’re ready to retire.
You invest the LIRA assets in various eligible options, including mutual funds, GICs, or stocks, with tax-deferred compounding. At retirement, you convert the LIRA into an income vehicle, such as a Life Income Fund (LIF), which sets withdrawal limits to ensure funds last through retirement.
Many investors use strategies like laddering fixed-income investments within their LIRA portfolios to manage risk and income streams effectively.
Examples and Use Cases
Here are practical scenarios illustrating how LIRAs function in real life:
- Job Transition: After leaving her employer, Sarah rolls over her pension funds into a LIRA and invests in a diversified portfolio of mutual funds and stocks, similar to those offered by Delta. She plans to convert it to a LIF at age 55 for steady retirement income.
- Divorce Settlement: John’s pension benefits are split, with a portion transferred to his ex-spouse’s LIRA, ensuring her locked-in retirement security.
- Provincial Differences: In Saskatchewan, a LIRA can convert to a Prescribed Retirement Income Fund (PRIF), offering more withdrawal flexibility compared to equivalent plans in other provinces.
- Investment Choices: You might select low-cost, diversified options from guides like the best low-cost index funds to grow your LIRA balance efficiently over time.
Important Considerations
Before using a LIRA, consider the strict withdrawal rules and the importance of planning your retirement income carefully. Early access is limited and typically requires specific conditions to be met.
Additionally, investment choices within a LIRA impact growth potential and risk; consider balancing your portfolio with advice from professionals or resources such as the best ETFs and best bond ETFs for diversification. Understanding these factors will help you maximize your retirement income while adhering to legal restrictions.
Final Words
A Locked-In Retirement Account (LIRA) securely preserves your pension funds with tax-deferred growth but restricts early access to protect your retirement income. Review your provincial rules and investment options now to ensure your locked-in funds align with your retirement timeline and goals.
Frequently Asked Questions
A Locked-In Retirement Account (LIRA) is a Canadian registered investment account designed to hold pension funds transferred from a former employer's registered pension plan. It functions like an RRSP but has strict restrictions to preserve retirement income.
No, personal contributions to a LIRA are not allowed. It only accepts transfers from pension plans when you leave an employer or in specific situations like divorce or for surviving spouses.
Funds in a LIRA are locked in and cannot be withdrawn early except in limited cases such as shortened life expectancy, non-residency in Canada for over two years, low expected income, or death. Otherwise, funds are usually accessed starting at retirement age.
By the end of the year you turn 71, you must convert your LIRA into an income vehicle like a Life Income Fund (LIF), Restricted LIF, Locked-in Retirement Income Fund (LRIF), Prescribed Retirement Income Fund (PRIF), or an annuity, depending on your jurisdiction.
Within a LIRA, you can invest in eligible options such as mutual funds, Guaranteed Investment Certificates (GICs), and stocks. The investment growth is tax-deferred until withdrawal.
No, withdrawal rules for LIRAs vary by federal and provincial or territorial pension legislation based on the original pension plan's jurisdiction. It's important to check the specific rules that apply to your plan.
If you pass away, the funds in your LIRA may be paid out to your designated beneficiary or estate. The specific rules depend on your plan and jurisdiction but generally allow for unlocking of funds upon death.
Typically, you can transfer your LIRA funds to another locked-in registered pension plan or income fund, maintaining the locked-in status and tax-deferred growth. Transfers must comply with the rules of both plans and jurisdictions.
