in Retirement Account LIRA , also referred to as a Locked in RRSP, allows you to continue growing your
pension plan savings after a change in your employment or marital status. It holds locked in pension funds for a
former plan member, an ex spouse or a surviving spouse. Here’s what you need to know regarding your pension
savings, and how a LIRA can help.
What is a pension?
For Canadians, there are three primary sources of income after retirement
- Personal savings in Registered Retirement Savings Plans RRSPs , which are transferred into accounts or
annuities that pay out a retirement income, based on your needs.
- Government benefits, including the Canada Pension Plan CPP or the Quebec Pension Plan, in Quebec
Old Age Security and OAS , which provide retirement income according to factors like how long you’ve worked and
lived in Canada.
- Employer pension plans
EPPs , which typically include contributions from both you and your employer. These
assets are invested and converted to income once you retire or reach a certain age.
sponsored pension plans are registered, which means they are subject to government regulations and
tax rules. When you accumulate pension funds as a group plan member, you cannot take money out until you are a
certain age and stop working.
If you leave your employer before retirement, a locked
in account will hold your accumulated pension funds. While
you’ll be restricted from making further contributions to this account, you can purchase investments like
mutual funds, segregated funds, stocks and bonds that help you grow these savings.
When would you open a LIRA?
You may be able to open a LIRA
with a financial services provider if, prior to retirement, you
- Change employers and leave a sponsored group pension plan.
- Split with your spouse and receive a portion of their pension assets in your settlement.
- Receive a spouse’s pension or LIRA as a beneficiary.
In each of these circumstances, a LIRA allows you to invest the transferred pension assets and manage growth on
your own terms. But, as the name suggests, funds in a LIRA are “locked in,” so you can’t take money out until
unless you qualify for an unlocking provision, according to your pension jurisdiction.
Defined benefit vs defined contribution plan
Your options when opening a LIRA depend on the type of employer plan you’re transferring. The most common plan
- A defined benefit pension plan, which guarantees you a percentage of your salary, yearly for life, when you
retire. The amount you receive depends on how long you worked and is not influenced by market fluctuations.
- A defined contribution pension plan, where your employer agrees to contribute a specific amount. This does
not guarantee you a defined income upon retirement. Your account’s value is subject to how the invested
Defined contribution plans can be moved to a LIRA without many restrictions. But, if you leave an employer with a
defined benefit plan, you’d have to take the “cash out” option
also called commuting the pension if you want
to transfer it to a LIRA. In this case, you can transfer a specific maximum to a LIRA and take the remaining
funds as taxable cash. While you lose the defined yearly retirement income from the plan, you gain the
opportunity to grow the funds through investments inside your LIRA.
How do LIRAs compare?
LIRAs are like RRSPs for your pension funds. Both accounts offer tax
deferred growth, meaning that your money is
not subject to tax until you withdraw it in retirement presumably, at a lower tax rate than when you were
working . You can also take advantage of similar investment options.
So, what’s different? Locked
in accounts are designed solely for pension funds, which make them inherently less
flexible than RRSPs. The following table provides an at a glance comparison
||You can contribute up to your yearly limit, until the end of the year you turn 71.
||Once you make the initial transfer from a pension plan, you can’t make additional
contributions, however funds from other pensions can be added.
||You can withdraw any amount of money as income before retirement. Keep in mind that
you will pay tax on any funds you take out of your RRSP.
||Typically, you can’t make withdrawals until you transfer the funds to a LIF, LRIF or
annuity in retirement. This could be sooner, if you qualify for an unlocking provision
you would be
taxed similar to RRSP withdrawals|
||You can make tax
free withdrawals if you put the money toward your first home or
Exceptional circumstances allow you to unlock the funds. These include eviction,
reduced life expectancy, permanent departure from Canada, high medical costs, among others.
In some provinces, you can unlock 50% of your account balance when you turn 55, subject to
restrictions and taxes.
||Accounts are regulated federally through the Canada Revenue Agency CRA . Rules are standard across Canada.
||Accounts are regulated provincially to align with corresponding pension plan laws. Rules vary from province to province.
What happens to your LIRA when you retire?
Just as you transfer RRSP funds to a Registered Retirement Income Fund RRIF , LIRAs have a similar income generating counterpart the Life Income Fund LIF that pays out a regular retirement income.
Along with funds from LIRAs, LIFs can hold money that comes directly from your defined contribution or defined benefit pension plan when you retire. Like RRIFs, LIFs offer tax
deferred growth, can hold a variety of investment vehicles, and require a minimum annual withdrawal. For both accounts, all income withdrawals are subject to tax. There are, however, two main differences between a RRIF and a LIF
- LIFs have annual maximum withdrawal limits.
- In some provinces, LIFs must be converted into an annuity by December 31 of the year you turn 80.
Yearly maximum withdrawals for LIFs vary by jurisdiction. The yearly minimum limits are defined by your age, as follows
|95 and older
Annual maximums make LIFs more restrictive than RRIFs. Therefore, when withdrawing an annual retirement income from these two sources, it may be beneficial to draw more from your LIF before your RRIF. This can improve your financial flexibility over time by exhausting the more restrictive account first.
Other options for your LIRA in retirement
A LIF isn’t the only way to draw a retirement income from your LIRA. You can also convert your LIRA to
- A life annuity, which pays you a guaranteed income for life.
- Alternative retirement accounts, such as an LRIF, PRRIF or RLIF, which vary by province and may bring fewer restrictions than a LIF.
Now that you’ve locked down the locked
in basics, ready to transfer a pension fund to a LIRA or a LIF?
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The information contained in this report was obtained from sources believed to be reliable;
however, we cannot guarantee that it is accurate or complete and it should not be considered personal taxation
advice. We are not tax advisors and we recommend that clients seek independent advice from a professional tax
advisor on tax related matters. Mutual funds are offered through Co Financial Investment Services Inc.
to Canadian residents except those in Quebec and the territories. Segregated funds and annuities are
administered by operatorsCo Life Insurance Company. operatorsCo Life Insurance Company and operatorsCo
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