Locked-in Retirement Account | TD Direct Investing (2024)

A Locked-In Retirement Account (LIRA) is an account to invest company pension funds in when you leave an employer because of job loss, change of employment, retirement or other reasons. Sometimes called a roll-over retirement fund, the money in a LIRA is “locked-in” and cannot be withdrawn until you are at least 55 years old and retired, though certain exceptions may apply.

Who is eligible, and who is LIRA for?

If you are under 71 years of age with an employer-sponsored pension plan you are eligible to open a LIRA, but there may be other options for your pension to consider. The first option is to leave your money in the old pension plan when you change employers, assuming this is permissible by the rules of this plan.

The second option is to take your money and transfer the assets to a new employer-sponsored account if a new plan is available and allows you to do so. Last but not least, another option is putting your pension funds in a LIRA. This option is like the others as it locks your pension funds in the account until you retire (certain exceptions may apply), but a LIRA also offers the flexibility to choose where you invest your money. Similar to a Registered Retirement Savings Plan (RRSP), you can invest in a variety of investment vehicles such as mutual funds, segregated funds, stocks and bonds etc.

Key features of a LIRA

• Pension funds in a LIRA cannot be withdrawn early except under a very few circ*mstances, and the money cannot be used as anything other than income for your retirement once you reach 55 years of age.
• Pension funds in your LIRA must be fully withdrawn by December 31^st of the year in which you turn 71.
• Once you transfer your pension funds to a LIRA, you cannot make any further contributions to the account. LIRAs are meant only to hold pension assets and the only deposit or transfer that takes place will be at the time you open the account.
• You cannot transfer your LIRA account to someone else, but there are circ*mstances where the contents may be redistributed. The income from the account maybe distributed to a surviving spouse or common-law partner in the event of the account holder’s death, or assets can also be distributed to an ex-spouse if stipulated by the terms of a spousal or support agreement stemming from a separation or divorce.
• You cannot use the money in your LIRA as security to apply for a loan or credit, and the income within the account cannot be seized by creditors for any reason (though it can be seized once withdrawn and becomes income).

Pros and Cons of Opening a LIRA

Some advantages of opening a LIRA include:

• All funds within the LIRA are tax-deferred until they are withdrawn.
• You have control of your pension funds and where they are invested - instead of an employer deciding for you.
• Eliminates the risk of your former employer going out of business and you losing your pension funds.
• “Locked-In” means that it lessens the temptation for those of us who lack self-restraint and might try to use pension funds earlier than planned. However, with certain unlocking exceptions, for those who qualify may also have the option to unlock LIRA.

Some disadvantages of a LIRA:

• No withdrawals are permitted until you’re 55 years old. “Locked-In” also means no access to your money until the rules say so!
• Flexibility is limited when compared to an RRSP. RRSPs allow you to continue to make contributions over the life of the account, but you can’t make continued contributions to a LIRA once it has been set up.
• Varied legislation by province can make it tricky to track what you’re allowed to do with your money and when.
• Your LIRA must be converted to a life annuity fund or another retirement-based type fund (Life Income Fund (LIF), Locked-in Retirement Income Fund (LRIF)) before the end of the year in which you turn 71.
• Financial institutions can charge high management fees for LIRA.

There are three main sources of primary income after retirement in Canada:

1. Registered Retirement Savings Plans (RRSPs): Personal savings that are tax-deferred until they are withdrawn and become a retirement income source.
2. Government Benefits: Canada Pension Plan (CCP), Quebec Pension Plan (in Quebec) and Old Age Security (OAS) pay out retirement income amounts based on various factors such as length of residence and employment in Canada.
3. Employer Pension Plans (EPP): These are plans that typically are contributed by both employer and employee. These assets are then invested throughout your career and paid out as income once you retire or reach an age of requirement for payout.

While LIRAs may be distinct from the savings plans above, they also work in collaboration with these income sources as well.

Generally speaking, withdrawals from any of these accounts (including LIRA) are all bound by certain age and time restrictions which dictate when you can begin withdrawals on your retirement savings. A LIRA also has an age limit (71 years old) before which you can open an account, and after which you must transfer the account into an income stream for retirement.

LIRAs and employer pension plans work together in situations where an employee has changed employment and requires an investment tool for the income earned from their pension at their previous employer.

Both a LIRA and an RRSP allow you to invest in various investment vehicles such as mutual funds, Guaranteed Investment Certificates (GICs), stocks and bonds, etc., and the money in these accounts is tax-deferred until withdrawn as income after retirement. RRSP accounts allow you to make continuous contributions over time while a LIRA does not.