What is a locked-in retirement account?
A locked-in retirement account (LIRA) is a type of pension account registered in Canada that does not allow withdrawals before retirement, except in exceptional circumstances. Locked-in retirement accounts are designed to hold pension funds for former participants in an employer-sponsored plan and certain others until they reach retirement age.
Key points to remember
- A locked-in retirement account (LIRA) is a Canadian retirement savings account funded by funds transferred from an employer-sponsored pension plan by the beneficiary of the account.
- The funds are tax-sheltered and cannot be withdrawn until retirement.
- Upon retirement, the money from a LIRA can be transferred to another pension fund or used to purchase a life annuity.
- Locked-in retirement accounts are governed by provincial pension legislation.
- Federal pension laws govern a similar type of account known as a locked-in registered retirement savings plan.
Understanding the CRI
A LIRA is a tax-deferred retirement account used to protect money transferred from an employer-sponsored retirement plan, much like a 401(k) rollover to an IRA in the United States. A LIRA can only be funded this way and you cannot make additional contributions to it.
Transferring money from an employer pension to a LIRA is only allowed in certain circumstances. For example, the beneficiary may have left the employer, the pension funds may have been split with an ex-spouse as a result of a divorce settlement, or the beneficiary may have died, leaving their pension money to an heir.
Cash withdrawals are not permitted while funds are locked, although the account can be unlocked in certain emergency circumstances. Pension funds that are transferred to a LIRA can then be used to purchase a life annuity or can be transferred to a life income fund (LIF) or a locked-in retirement income fund (LRIF) or a combination thereof.
When the beneficiary of the account reaches retirement age, the life annuity, LIF or LRIF will provide him with a life annuity.
A Registered Retirement Savings Plan (RRSP) (except for immobilized type) can be cashed at owner’s discretion. The CRI does not have such an option.
If the employer’s pension plan falls under federal rather than provincial jurisdiction, the member’s money would be transferred to a locked-in registered retirement savings plan (also called a LRSP), rather than a LIRA. Both are very similar in their operation.
Government requirements for LIRAs
LIRA plans are governed by provincial pension legislation. Each locked-in annuity must comply with the laws of a particular province.
According to the Quebec government website, for example:
Unlike an RRSP, the funds in a LIRA are locked in and can only be used to provide retirement income. Thus, the sums cannot be withdrawn, except in certain circumstances where a reimbursement of your LIRA is permitted. Like an RRSP, you can hold a LIRA until December 31 of the year you turn 71. Before this date, you can transfer your LIRA to another LIRA, for example if you change financial institution. You can also transfer your life income fund (LIF) to a LIRA, especially when you want to defer the payment of retirement income. Consult the list of financial institutions offering LIRAs or LIFs to find out about the transfer instruments available.
Depending on the province in which the plan holder lives, there may be different rules on how to unlock locked-in pension funds. Allowable reasons for releasing a LIRA may include low income, potential foreclosureeviction from a tenancy, first month’s rent and security deposit, high medical or disability bills, shortened life expectancy and permanent departure from Canada.
The 50% release of a LIRA can be done only once if you are 55 or older in some provinces. Unlocking a small balance is allowed if the balance is below a certain amount.
If you need to withdraw money from a LIRA before it is normally permitted, it is best to consult a Financial Advisor who knows the rules that apply in your province, especially if the amount involved is significant.
How are locked-in retirement accounts taxed?
Money in a locked-in retirement account continues to grow tax-deferred until it is withdrawn.
Where can you buy a LIF or LRIF?
Life income funds (LIFs) and/or locked-in retirement income funds (LRIFs) are offered by banks, credit unions, trust companies and insurance companies. The financial institution must be on the province’s approved list of institutions to accept locked-in fund transfers.
What is a life annuity?
A life annuity is an insurance contract that provides guaranteed income for life, usually in exchange for a lump sum payment.
A locked-in retirement account (LIRA) can be used to hold funds transferred from an employer-sponsored retirement plan without losing its tax-deferred status. LIRAs are governed by provincial laws and can only be opened in certain circumstances. Upon retirement, the beneficiary of the account can transfer the money to several types of accounts that will provide them with a regular income for life.