What Is A LIRA In Canada?

A Locked-In Retirement Account (LIRA) is a registered retirement savings plan designed specifically to hold locked-in pension funds for Canadians. Unlike Registered Retirement Savings Plans (RRSPs), LIRAs have restrictions on contributions and withdrawals designed to ensure the funds are preserved for retirement income.

In this guide, we will explain everything you need to know about LIRAs in Canada – from eligibility rules to withdrawal restrictions. You’ll learn how LIRAs work, their key benefits, and how to open, contribute, withdraw funds, and ultimately convert your LIRA for retirement income.

What is a LIRA?

A LIRA is a retirement savings account used to hold locked-in pension assets from a former employer’s pension plan. The money in a LIRA is “locked-in”, meaning it cannot be withdrawn in cash before retirement age except under special circumstances.

LIRAs are designed to preserve pension funds and ensure they are used for retirement income. The locked-in rules align with the pension legislation that governed the original pension plan.

Here are 6 key facts about LIRAs in Canada:

Eligibility: Canadians under age 71 with funds in a defined benefit or defined contribution pension plan.
Locked-In Rules: Funds generally cannot be withdrawn as cash before age 55.
Source of Funds: Pension assets transferred from an employer’s pension plan.
Tax Treatment: Tax-deferred growth, withdrawals taxed as income.
What Happens at Age 71: LIRA funds must be used to purchase an annuity or transferred to a LIF.
Provincial Regulation: Rules can vary across different jurisdictions in Canada.

LIRAs are regulated provincially, so the specific rules can vary across Canada. But in all cases, the purpose is to ensure pension savings are preserved for retirement income.

How is a LIRA Different from Other Retirement Accounts?

LIRAs have unique rules that distinguish them from other common registered accounts used for retirement savings:

RRSPs – Allow contributions over time and withdrawals at any age, though restrictions and taxes may apply. LIRAs only accept a single transfer of pension funds.
Defined Benefit Pension Plans – Provide guaranteed income in retirement. LIRA balances depend on investment performance.
Defined Contribution Pension Plans – Also based on contributions and investment gains but remain with the employer. LIRAs are self-directed accounts.
Registered Pension Plans (RPPs) – Require employer sponsorship and contributions. LIRAs hold pension funds from a former RPP.
Locked-in RRSPs – Nearly identical to LIRAs but hold federally regulated pension funds. LIRAs are provincially regulated.

The locked-in rules are what set LIRAs apart from these other options. LIRAs preserve pension assets in a personal account while preventing full withdrawals until retirement.

How Does a LIRA Work?

Let’s look at how locked-in rules affect contributions, withdrawals, taxes, and required conversions at age 71:

LIRA Contributions

The only contribution to a LIRA is the initial transfer of funds from your former workplace pension plan.
You cannot make additional contributions over time as you would to an RRSP.
Your former employer may charge a processing fee that is deducted before the transfer, reducing the LIRA contribution amount.
The amount that can be transferred is based on the commuted (lump-sum) value of your pension entitlement plus any excess contributions you made.
Any pension funds above the maximum transferable amount must be taken in cash and taxed appropriately.
Transferring funds from another LIRA or locked-in account directly to your new LIRA may be permitted, depending on provincial regulations.

Withdrawing Funds from a LIRA

No withdrawals of LIRA funds are permitted in cash before the age of 55 except in special circumstances.
Starting at age 55, rules vary by province, but you may unlock up to 50% of LIRA funds under some jurisdictions. A portion can be withdrawn as cash or transferred to an RRSP or annuity.
Some provinces allow full LIRA withdrawals at age 65. Others require funds to stay locked in until you take retirement income.
Early withdrawal may be permitted due to financial hardship, reduced life expectancy under 2 years, or non-residency status. Certain additional conditions apply to qualify for these exceptions.
By December 31st of the year, when you turn 71, all LIRA funds must be transferred to a LIF, LRIF, or annuity or withdrawn as retirement income where permitted. No funds can remain in the LIRA.
If you pass away before withdrawing your LIRA, a surviving spouse or named beneficiary may be eligible to receive proceeds, depending on specific provincial regulations.

LIRA Taxes

LIRAs benefit from tax-deferred growth on investments, similar to an RRSP. You do not pay tax on any investment income or growth until funds are withdrawn.
Any cash withdrawals from your LIRA are taxed as regular income at your marginal tax rate in the year of withdrawal. This includes any amounts unlocked at age 55.
Unlike RRSP contributions, you cannot deduct LIRA contributions from your income for tax purposes, as they are pension funds on which you have already received tax relief.
At retirement, withdrawing funds gradually over a number of years helps smooth your income and potentially lower your taxes compared to withdrawing a lump sum all at once.
Tax is not withheld on any direct LIRA to LIRA transfers. Tax is only paid when you ultimately withdraw funds as retirement income.

Not sure if your retirement savings are on track? Learn what it takes to retire comfortably in Canada.

What Happens at Age 71 with LIRAs?

LIRAs have a maximum age limit. By no later than December 31st of the year you turn 71, you must:

Convert your LIRA to retirement income by transferring it to a Life Income Fund (LIF) or Locked-in Retirement Income Fund (LRIF) and/or
Use the funds to purchase an annuity that will provide guaranteed retirement income and/or
Withdraw any portion of the LIRA eligible to be paid out as cash or taxed as income (based on your province).

You cannot keep funds in a LIRA past age 71. This rule prevents indefinite tax deferral on pension assets. Your options depend on the regulations where you live and the origin of the pension funds. A financial advisor can explain your specific options.

Why Should You Open a LIRA?

There are five benefits that make opening a LIRA advantageous compared to cashing out your pension or leaving it with your former employer:

Tax-Deferred Growth

Keeping pension assets in a LIRA allows for continued tax-deferred growth, maximizing the value of the savings. Your investments grow tax-free until withdrawals begin after age 55 or in retirement. This can boost returns compared to holding assets outside a registered account.

Account Flexibility

You can open a LIRA at any financial institution and invest the funds as you choose. This gives you control over the investments compared to leaving your pension with a former employer or annuity provider. You can diversify assets within your LIRA based on your specific risk preferences, investment knowledge, and retirement goals.

Creditor Protection

LIRA funds are exempt from seizure by creditors in the event of bankruptcy, insolvency, or legal actions. This preserves pension savings for your retirement income regardless of any debts or liabilities. Funds are only accessible once eligible withdrawals begin.

No Employer Dependence

With a LIRA, your retirement savings are no longer tied to the fate of your former employer. If the company goes out of business, your pension would be at risk if you left it under their management. With a LIRA, you control the account regardless of your former employer’s situation.

Forced Retirement Savings

The locked-in rules prevent full withdrawals from a LIRA before retirement age, except in extenuating circumstances. This helps ensure the funds are preserved over the long term and enhances retirement income security. The restrictions aim to prevent pension savings from being spent frivolously or drawn down too quickly.

What Are The Downsides of a LIRA?

The locked-in rules that provide benefits also create four limitations to weigh:

No access to funds before retirement – Except in special cases, LIRA funds cannot be withdrawn before age 55, limiting flexibility.
Account fees – Financial institutions may charge higher fees for LIRAs compared to RRSPs to offset administrative costs.
Complex provincial regulations – Rules can vary across jurisdictions, making LIRAs more complex than national standard RRSP rules.
Mandatory conversions at age 71 – Funds cannot remain indefinitely tax-sheltered and must be converted to an income stream by the end of the year you turn 71.

For many, however, the tax-deferral benefits and creditor protection outweigh the drawbacks. LIRAs provide security for retirement savings from pension plans.

How to Open and Contribute to a LIRA?

If you have pension funds available for transfer, here is how to open and contribute to a LIRA:

1. Choose a LIRA Provider

Select a financial institution for your LIRA based on the following:

Investment options and account flexibility
Fees charged and account minimums
Customer service standards
Tools and resources provided

Banks, credit unions, brokerages, insurance companies, or financial advisors can all offer LIRAs. Compare options to find the best fit.

2. Open a LIRA Account

Complete an application to open a LIRA with your selected provider.
Account opening documentation and processes vary across institutions.
You may need to provide personal information, details on your former pension, and proof of age.
Providers are required to ensure you qualify and understand LIRA rules before opening an account.

3. Request your Pension Plan Statement

Contact your former employer’s pension plan administrator to request a statement showing the value of your pension entitlement.
This commuted (lump-sum) value will determine the potential LIRA contribution amount.
Statements may only be calculable as of a specific date, which must be less than 180 days before the transfer.

4. Request a Pension Transfer Estimate

Ask your pension administrator for an estimate of the amount that can be transferred to a LIRA.
This considers any fees, charges, or maximum transfer limits.
It will indicate if any portion may be paid in excess as cashless withholding tax.
Estimates are based on statements showing your entitlement value.

5. Complete Pension Transfer Forms

Once you have an estimate, complete the LIRA transfer direction forms required by your pension administrator and financial institution.
Forms authorize the transfer of your eligible pension funds to the LIRA.
Your spouse or common-law partner may need to provide consent.

6. Transfer the Funds to your LIRA

The pension administrator liquidates your pension entitlement, withholds any tax on amounts paid in excess, deducts applicable fees, and transfers the LIRA contribution amount.
Timelines vary, but transfers generally occur within 2-3 weeks after completed paperwork is received.
Your financial institution invests the funds according to your instructions once received.

And that’s it! Your LIRA is now funded and ready for you to grow your retirement savings.

Withdrawing Funds and Transferring a LIRA

With some exceptions, funds cannot be withdrawn from a LIRA in cash before retirement age. Here are 3 key rules around withdrawals and transfers:

Unlocking LIRA Funds at Age 55

Most Canadian pension jurisdictions allow you to unlock and withdraw up to 50% of your LIRA at age 55 or older. However, this does not apply in all provinces.
Unlocked amounts can be:
- Withdrawn in cash (taxed as income)
- Transferred to an RRSP or annuity (remains tax-deferred)
- Transferred to an insurance company for a life annuity (tax-deferred)
Under the Ontario Pension Benefits Act, the 50% rule allows unlocking at age 55:
- 25% unlock + 25% no earlier than 60 days later
- Two separate 12.5% unlocks + 25% at least 60 days later

Unlocking More Funds at Age 65

Some provinces allow you to unlock more than 50% of your LIRA at age 65 or later.
For example, in Saskatchewan, Alberta, and Manitoba, 100% of LIRA funds can be unlocked at age 65 and withdrawn or transferred as you choose.
Quebec, British Columbia, and other jurisdictions still restrict full cash withdrawals until actual retirement despite age 65 eligibility.
Consult your province for specific guidelines on LIRA unlocks at age 65 and beyond. Rules are not consistent nationwide.

Exceptions for Early Withdrawal

These situations may allow you to withdraw funds from your LIRA before age 55 in certain provinces:

Financial Hardship – Severe financial difficulty meeting basic living expenses. Specific qualifications must be met.
Reduced Life Expectancy – Having a terminal illness or disability reducing life expectancy to less than 2 years. Physician attestation is required.
Non-residency – Permanently moving outside Canada after being a non-resident for at least 2 years. The tax applies to withdrawals.
Small Balance Unlock – Having a low LIRA balance below a specific threshold (such as less than 40% of YMPE) may qualify you for unlocking the full amount.
Marriage Breakdown – A LIRA may be divided or unlocked as part of a divorce or separation agreement.

If you qualify for an exception, certain forms, documentation, spousal consent, or regulatory approvals are usually required before early withdrawal can occur. Eligibility criteria can also vary between provinces.

What Happens to a LIRA at Retirement?

life buzz quote in canada new 8 1 — What Happens to a LIRA at Retirement?

As retirement approaches, you must decide what to do with your LIRA funds no later than the year you turn 71. Here are 5 options:

1. Transfer to a LIF

LIF stands for Life Income Fund. It is a locked-in account like a LIRA, but it provides more income flexibility in retirement.
Funds remain locked-in, and you must withdraw a minimum retirement income amount each year starting no later than age 72.
Annual LIF withdrawals are limited to prevent depleting the balance too quickly. Maximums apply based on your age and account balance.
LIFs are available in all pension jurisdictions and allow continued tax-deferred growth on balances after age 71.

2. Transfer to an LRIF

An LRIF is a Locked-in Retirement Income Fund, similar to a LIF.
The key difference is there is no maximum withdrawal limit. You decide the income amount drawn each year.
Minimum withdrawals are still required, and funds kept in the account continue to grow tax-free.
Available in pension jurisdictions that do not require maximum withdrawal limits.

3. Purchase a Life Annuity

You can use LIRA funds at age 71 to buy an annuity from an insurance provider.
This pays out a fixed guaranteed income amount for life or a set period, regardless of market performance.
The benefit is the certainty of income at the cost of liquidity and access to any remaining capital.
Optional annuity features are available to cover scenarios like a spouse after death.

4. Withdraw the Funds as Cash

Some provinces permit full LIRA cash withdrawals upon retirement after age 65. Others require funds to go into a retirement income account.
Any amounts not transferred to a LIF, LRIF, or annuity can be withdrawn and taxed as regular income.
This provides accessibility but eliminates tax-deferral benefits and risks the longevity of funds.
It may be beneficial if you have adequate savings elsewhere or wish to pay down debts.

5. Transfer to an RRSP

In some pension jurisdictions, such as federally regulated plans, you may be able to transfer LIRA funds to an RRSP.
Doing so provides added flexibility for withdrawals but reduces future tax-deferred space for regular RRSP contributions.
Your maximum RRSP limit is reduced by the LIRA transfer amount. Consider whether you expect to need that room for future RRSP contributions.
Transfers to RRSPs are limited based on provincial regulations for provincially regulated LIRAs.

A qualified financial advisor can outline the options specific to your pension jurisdiction and help determine the best approach to meet your needs.

If you retire, the following retirement insights will further enhance your preparation for retirement in Canada:

Summary

LIRAs offer Canadians a way to keep their pension savings invested for retirement if they change jobs or leave an employer before the official retirement age. The locked-in account rules aim to ensure the funds are preserved over the long term.

With limits on contributions and withdrawals, LIRAs have unique regulations compared to RRSP accounts. However, LIRAs provide maintenance of pension savings’ tax-deferred status along with creditor protection.

Thoroughly weigh the pros and cons of LIRA features, investment options, provider fees, and your personal financial situation. When used strategically, LIRAs can optimize pension assets through tax-deferred growth for decades until retirement income is required. With proper decumulation, a LIRA can generate secure tax-efficient retirement income from pension funds for life.

Frequently Asked Questions about LIRA in Canada

Can I contribute to a LIRA?

No, you cannot make new contributions to a LIRA. A LIRA can only accept funds transferred from a registered pension plan. No other deposits can be made. Additional contributions over time are not permitted, unlike with RRSPs.

What is the difference between a LIRA and an RRSP?

Both LIRAs and RRSPs are registered accounts that provide tax-deferred growth on retirement savings. The key differences are:
Contributions – LIRAs can only accept transferred-in pension funds, while RRSPs accept ongoing contributions up to your deduction limit.
Withdrawals – LIRAs cannot be withdrawn before retirement age except in special cases. RRSPs can be withdrawn from at any time, though taxes apply.
Origins of Funds – LIRAs hold funds originating from an employer pension plan. RRSPs hold contributions from yourself and/or your employer.
Mandatory Conversion – LIRAs must be converted to retirement income by age 71. RRSPs can continue indefinitely.

What happens if I leave Canada permanently?

Some provinces allow non-residents to unlock LIRA funds as cash upon permanently leaving Canada. Additional documentation and certification of non-residency are typically required. The withdrawal is taxed as income. Locked-in accounts may also be eligible for transfer to an equivalent tax-deferred account in your new country of residence.

Do LIRAs have contribution limits?

No, there are no CRA limits on the amount transferred into a LIRA, unlike RRSP contribution room limits. However, your former pension administrator will calculate a maximum transferable amount based on your plan's specific provisions. Any excess not transferred to the LIRA must be withdrawn in cash and taxed.

Can I transfer my LIRA to someone else?

Generally, LIRA funds cannot be transferred to another person except for a beneficiary inheriting LIRA proceeds after your death. In that case, a spouse beneficiary has the option to transfer inherited LIRA funds tax-deferred based on pension rules.

What happens to my LIRA if I die?

If you pass away before withdrawing the funds, your designated LIRA beneficiary will receive the proceeds. These are paid out tax-free to a surviving spouse beneficiary, who can transfer the funds to their RRSP or other registered plan. Alternate beneficiaries must withdraw the LIRA proceeds as taxable cash.

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