What is a LIRA Account? And How Does it Work?

A Locked-In Retirement Account (LIRA) is a specialized Canadian investment account designed to hold pension funds transferred from a former employer’s pension plan, whether it’s a Defined Contribution or Defined Benefit plan. Unlike a Registered Retirement Savings Plan (RRSP), where contributions can be made at any time and funds can be withdrawn (subject to taxes), a LIRA is “locked-in,” meaning you cannot make additional contributions or withdraw funds until retirement, except under specific circumstances.

Key Differences Between LIRA and RRSP:

• Source of Funds: LIRAs hold pension money transferred from a former employer’s pension plan, whereas RRSPs contain personal contributions made by the individual.
• Flexibility: RRSPs offer more flexibility, allowing withdrawals at any time (subject to withholding tax), while LIRAs are generally locked-in until retirement, with limited exceptions.
• Contributions: You can contribute to an RRSP up to your annual limit until December 31 of the year you turn 71. In contrast, once funds are transferred into a LIRA, no additional contributions are permitted.

What Happens to a LIRA at Retirement?

By the end of the year you turn 71, you must convert your LIRA into one of the following to start receiving retirement income:

1. Life Income Fund (LIF): Similar to a Registered Retirement Income Fund (RRIF), a LIF allows for annual withdrawals within minimum and maximum limits set by legislation.
2. Life Annuity: This option provides a guaranteed income for life, purchased from an insurance company.

Unlocking a LIRA:

While LIRA funds are generally locked-in until retirement, certain conditions may allow for early unlocking:

• Small Balance: If the total value of your LIRA is below a specific threshold, you may be permitted to unlock and withdraw the funds.
• Shortened Life Expectancy: A medical certification indicating a significantly reduced life expectancy can allow for early access to LIRA funds.
• Non-Residency: If you have been a non-resident of Canada for at least two consecutive years, you may be eligible to unlock your LIRA.
• Financial Hardship: Some jurisdictions permit unlocking due to financial hardship, such as low income or high medical expenses.

It’s important to note that rules for unlocking a LIRA vary by province and the specific terms of your plan.

Recommended Strategies for Managing a LIRA:

1. Consider Partial Unlocking: If permitted, unlocking up to 50% of your LIRA and transferring it to an RRSP can provide greater flexibility in managing your retirement funds.
2. Maximize Withdrawals from LIF: Once your LIRA is converted to a LIF, consider withdrawing the maximum allowable amount annually to maintain control over your funds and potentially reduce future tax liabilities.
3. Early Conversion to LIF: Depending on your financial situation and tax implications, converting your LIRA to a LIF before reaching the mandatory conversion age can provide earlier access to your funds.

Managing a LIRA requires careful planning and consideration of various factors, including tax implications, provincial regulations, and your overall retirement strategy. Consulting with a financial advisor can help you navigate these complexities and make informed decisions to optimize your retirement income.