Locked-in Retirement Account LIRA Definition and How It Works
Contents
Locked-in Retirement Account (LIRA): Definition and How It Works
What Is a LIRA?
A LIRA is a registered pension account in Canada that does not permit withdrawals before retirement. It holds pension funds for former employer-sponsored plan participants and others until they reach retirement age.
Key Takeaways
- A LIRA is a Canadian pension savings account funded by money transferred from an employer-sponsored pension plan.
- The funds are tax-sheltered and cannot be withdrawn until retirement.
- At retirement, the money in a LIRA can be transferred to another retirement fund or used to purchase a life annuity.
- LIRAs are governed by provincial pension laws.
- A similar type of account, known as a locked-in Registered Retirement Savings Plan (RRSP), is governed by federal pension laws.
Understanding the LIRA
A LIRA is a tax-deferred retirement account used to hold money transferred from an employer-sponsored pension plan. Additional contributions cannot be made to a LIRA.
Transferring money into a LIRA is allowed under certain circumstances, such as leaving an employer, dividing pension funds in a divorce settlement, or designating an heir after death.
Cash withdrawals are not permitted while the funds are locked in, but exceptions can be made for emergencies. Pension funds in a LIRA can be used to purchase a life annuity or transferred to a life income fund (LIF) or a locked-in retirement income fund (LRIF).
Upon reaching retirement age, the beneficiary can receive a pension for life through a life annuity, LIF, or LRIF.
A Registered Retirement Savings Plan (RRSP) can be cashed in at the owner’s discretion, unlike a LIRA.
Note
If an employer pension plan falls under federal jurisdiction, the participant’s money would be transferred into a locked-in Registered Retirement Savings Plan (locked-in RRSP) instead of a LIRA. The two function similarly.
Government Requirements for LIRAs
LIRA plans are governed by provincial pension laws in Canada.
According to the Québec government website:
Unlike an RRSP, the funds in a LIRA are locked-in and can only be used to provide a retirement income. The amounts cannot be withdrawn, except under certain circumstances allowing for a refund from the LIRA. A LIRA can be held until December 31 of the year the individual turns 71. Before that date, it can be transferred to another LIRA, such as when changing financial institutions. A life income fund (LIF) can also be transferred to a LIRA, particularly when delaying retirement income payment. To know what transfer instruments are available, consult the list of financial institutions offering LIRAs or LIFs.
Unlocking locked-in pension funds varies by province and may be possible under circumstances such as low income, potential foreclosure, eviction, medical or disability costs, shortened life expectancy, or permanent departure from Canada.
In some provinces, individuals aged 55 or older can unlock 50% of a LIRA once. Small balance unlocking is allowed if the balance is below a certain threshold.
If you require early access to a LIRA, it is advisable to consult a financial advisor familiar with the rules specific to your province.
Taxation of LIRAs
The money in a LIRA continues to grow tax-deferred until it is withdrawn.
Where Can You Buy a LIF or LRIF?
Life income funds (LIFs) and locked-in retirement income funds (LRIFs) are available from approved financial institutions such as banks, credit unions, trust companies, and insurance companies.
What Is a Life Annuity?
A life annuity is a contract that guarantees income for life in exchange for a lump-sum payment.
The Bottom Line
A LIRA is a tax-deferred account that holds money transferred from an employer-sponsored retirement plan. It is subject to provincial laws and can only be opened under certain circumstances. At retirement, the beneficiary can transfer the funds to various accounts that provide a regular income for life.