What is a LIRA? Well, a Lira is a Turkish coin and also an Italian predecessor to the violin. However, in the Canadian context, LIRA stands for Locked-In Retirement Account. This post will go over the question ‘what is a LIRA’ and what the difference is between a LIRA vs RRSP.
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If you’re worked for a company that provided a pension (either a defined contribution pension plan or a defined benefit pension plan) and then you moved jobs, you probably have a LIRA.
If you also are no longer participating in that particular pension plan your company offered, you may have been asked to decide whether you want to move it to a LIRA account.
Table of Contents
What is a Lira Account?
What is a LIRA? A LIRA as mentioned stands for Locked-In Retirement Account. A LIRA investment is like a ‘basket’ of your pension investment. Your money that was held IN the pension fund is no longer in the pension fund, but transferred to a LIRA.
In a LIRA your previous pension fund money will grow tax-free for as long as you keep the funds in the account.
A LIRA can be self-directed (e.g. you manage the investments yourself) but you cannot contribute your money into the LIRA. The LIRA is funded with your pension money (that is no longer in a pension fund).
The pension funds within a LIRA can be transferred to another retirement fund (transfer a LIRA from a big bank for example, to a LIRA with Questrade, a discount brokerage) or it can be used to purchase a life annuity.
You can hold a LIRA until December 31 of the year you turn 71. On this date, your LIRA will have to be closed.
Unfortunately, although a LIRA is a Canadian investment account, the specific rules for LIRA vary with each province. For example, the LIRA withdrawal rules vary between provinces.
THe Difference Between Lira and RRSP
To review the differences between a LIRA and an RRSP, let’s go over what an RRSP is, since we’ve already gone over what is a LIRA.
An RRSP stands for Registered Retirement Savings Plan. An RRSP is a tax sheltered savings plan meant for retirement. You contribute with pre-tax money and when the money is withdrawn during retirement, you are still taxed, but the expectation is that your income will be lower during retirement. Therefore, the marginal tax rate you will be at will be lower. Also, you would have many years of tax sheltered growth of your investments inside the RRSP.
Okay, now that we know what an RRSP is here are some similarities between the RRSP and the LIRA.
Both RRSP And LIRA Need to Be Converted at 71
What happens to a LIRA when you turn 71?
Well, both the RRSP and the LIRA have to be converted to a RRIF or a LIF on December 31 on the year that you turn 71.
They both go ‘poof’ at age 71.
Both LIRA and RRSP are “Baskets” of Investments
Another similarity between a LIRA and an RRSP is that they are just accounts. A LIRA is not an ‘investment’. You can’t say something like “Did you invest in a LIRA?” like how people say “did you invest in a LIRA” thinking an RRSP is an ‘investment’. A LIRA is like an RRSP in that they are both ‘basket’ of investments. It is a type of account.
Here is the key difference between a LIRA and an RRSP:
RRSP vs LIRA Contribution and Withdrawal
However, you cannot contribute further to a LIRA nor can you withdraw from a LIRA until retirement.
You can technically take money out of an RRSP but you will have to pay a withdrawal tax, you can also borrow money from your RRSP for the Home Buyer’s Plan or the LIfe Long Learning Plan.
You cannot take money out of a LIRA unless there are certain situations, such as financial hardship, or low life expectancy (and these rules vary between provinces)- more on that below.
Can a LIRA Be Self Directed?
When you’re thinking about what is a LIRA, there are self directed LIRA accounts.
Some people wonder if there’s a best LIRA account in Canada, but I wouldn’t say there is a single best LIRA account in Canada, and would say that it depends on whether you are comfortable being a self directed investor, or if you would rather be more hands off with the retirement money.
Here are some examples of LIRA accounts that you can open up, most financial institutions and self directed brokerages offer a LIRA.
- TD LIRA (Here is my review of TD Direct Investing)
- Wealthsimple LIRA
- Questrade LIRA (they also have Locked-In RRSP for the federally registered pension plan)
- Roboadvisors in Canada all have LIRA Account options
- BMO LIRA
- Scotia iTrade LIRA
Here are some Online Brokerage promotions if you are planning to transfer to a LIRA or LIF.
Can A Lira Be Transferred to AN RRSP
Can a LIRA be transferred to an RRSP?
Yes, it depends.
Technically you can, according to Jason Heath from Moneysense, in Ontario, within 60 days of the transfer of a LIRA to a LIF, you can withdraw up to 50%of that balance, or transfer some or all of an RRSP.
In Alberta you can do the same too.
Usually you cannot open a LIF until you are at least 55 years of age (or the typical earliest pension start age).
Lira Withdrawal Rules
When can you take money out of a LIRA?
There are only two ways you can withdraw from a Locked-In Retirement Account:
- Retirement occurs
- The LIRA is converted to a LIF (Life Income Fund) and this LIF can be used for retirement or it can be transferred to an insurer to purchase a life annuity
Technically if you can unlock your LIRA, you can withdraw money too, however there are specific reasons that you can do so, and the reason must be because of financial hardship.
Can YOU UNlock A LIra Account?
Under specific circumstances it may be possible to unlock a LIRA account, but they are specific circumstances and it varies from province to province or even federally if your LIRA is governed federally.
For example, in British Columbia, you can apply to unlock a LIRA account with a request to the BC Financial Services Authority for these specific circumstances:
- Low expected income for the next 12 months
- Mortgage arrears to avoid foreclosure on a principal residence
- Threat of eviction from principal residence due to rent arrears
- Medical costs (which includes renovations for a medical condition)
The scenarios for unlocking a LIRA or LIF in Alberta are similar to the above, too. A form is necessary to request unlocking due to the Alberta Employment Pension Plans Act (EPPA) and the Employment Pension Plans Regulation (EPPR).
In all of these, you have to have agreement from your spouse/ pension partner if applicable.
In Ontario, The Financial Services Regulatory Authority of Ontario also has similar situations where you can apply to unlock your LIRA or LIF funds once a year.
When you unlock your LIRA and withdraw the funds, you will have to pay a CRA withholding tax and other administrative fees from your LIRA financial institution.
For non-financial hardship reasons, you could unlock your LIRA in Ontario if you have a life expectancy of 2 years or less, you are a non-resident of Canada (and it’s been 2 years since you have left), or you are at least 55 years old and the total LIRA funds amount to less than 40% of the YMPE (Year’s Maximum Pensionable Earnings), this means you have to have a small balance in order to be able to unlock it.
Hope this post helped answer the question, what is a LIRA?
In summary, a LIRA is another type of registered account, and you will have a LIRA usually after you leave an employer that offered a pension plan.
With a LIRA (or self directed LIRA) you will assume responsibility with your future pension money. You cannot withdraw or unlock from the LIRA before age 55 unless there are some specific criteria that show financial hardship, and these vary from province to province.
If I decided to retire early and left my job in my 40’s (before the earliest start date of pension income at age 55), I would probably end up with a LIRA.
You may also be interested in:
Do you have a LIRA?
How do you invest your LIRA?
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