What Is a LIRA? Guide to Locked-in Retirement Accounts

A locked-in retirement account, or LIRA, is a government registered fund for your pension. More accurately, it is a “rolled-over” retirement account into which a locked-in company pension can be transferred. A LIRA does not allow for any cash withdrawals before retirement (except for in exceptional circumstances, as explained below).

As with Registered Retirement Savings Plans, or RRSPs, you can no longer hold a LIRA after December 31st on the year in which you turn 71. At this point, you must transfer the funds held in your LIRA into a life annuity, Life Income Fund (LIF), or Locked-in Retirement Fund (LRIF).

» MORE: How much money do you need to retire?

Who is eligible for a LIRA?

Only individuals under the age of 71 can open a LIRA. These accounts are meant for those who leave a job that had an employer-sponsored pension. If this described you, there are two options: remain in the pension plan and wait until retirement to receive your pension income, or take the commuted value of the pension and transfer it into a LIRA.

You can open a LIRA at just about any financial institution you like. You can also choose to manage it yourself, or have a robo-advisor or financial advisor do the investment work for you.

LIRAs are not just for former pension plan members but can also be for their former or surviving spouses or common-law partners.

» MORE: Defined benefit vs defined contribution pension plans

How to withdraw from a LIRA

Since LIRA plans are governed by provincial pension legislation, the rules on how to unlock and withdraw from a LIRA will differ from province to province.

Many provinces will allow you to unlock up to 50% of your LIRA at the age of 55 but, generally speaking, LIRAs do not allow for lump sum withdrawals. Your savings and investments are held until retirement, at which point you will transfer them into a LIF or purchase a life annuity.

While LIRAs are meant for retirement, there are a few special circumstances in which you may be able to withdraw a lump sum of cash from your LIRA at an earlier stage. These circumstances include:

Potential foreclosure.
Eviction from a rental.
Shortened life expectancy (due to terminal illness, for example).
Permanent departure from Canada.
Significant medical or disability expenses.

» MORE: How do Registered Disability Savings Plans work?

LIRA rules and tax implications

Like an RRSP, a LIRA is tax-sheltered. This means that as long as the money stays within the LIRA; you will not be taxed on any growth. Any withdrawals are taxed, however.. In most cases, your LIRA will remain untouched until it comes time to transfer it to a Life Income Fund (LIF) or a life annuity upon retirement.

Unlike with RRSP contributions, money transferred into a LIRA is not tax-deductible. You already benefited from a tax deduction when you contributed to your pension plan.

Since the rules and regulations of LIRAs vary by province, it may be necessary to speak to a financial advisor or knowledgeable representative from your financial institution to understand LIRA rules where you live.

» MORE: What is an RRSP?

LIRA pros and cons

If you’re leaving a job with a locked-in pension, here are things to keep in mind about LIRA:

Pros

Since LIRA funds are locked away, it’s a benefit to those who may be tempted to withdraw funds before retirement age.
LIRA investments can be self-managed rather than having to rely on your former place of work to do it.
LIRAs eliminate the risk of losing your pension money if your employer goes out of business.

Cons

Some financial institutions charge high management fees for LIRA accounts.
Regulations vary from province to province making it tricky to know the rules surrounding your LIRA.
Pre-retirement withdrawals are allowed only under limited circumstances.

LIRA alternatives

One alternative to the LIRA is a Locked-in Retirement Savings Plan, or LRSP. Essentially, these accounts follow the same structure and serve the same purpose. The main difference is that LIRAs are provincially managed while LRSPs are federally managed.

Also, if your company pension is not locked-in, you may be able to transfer it to an RRSP, which has a lot more flexibility in terms of contributions and withdrawals.

You can choose a beneficiary for your LIRA should you pass away. At this point, it is no longer locked. If it is paid to a spouse, they can make a tax-free transfer into their own RRSP or Registered Retirement Income Fund (RRIF).

No, you can’t. A LIRA is only for preserving locked-in pension amounts.

Early LIRA withdrawals are only allowed in very specific situations, such as potential foreclosure or eviction. Your LIRA is meant to be used in retirement, and the rules and regulations surrounding this account make it difficult to withdraw funds early.