Let’s say you’re a lucky Canadian with a workplace pension. At some point, based on that workplace pension, you might own a LIRA and/or need to turn that LIRA into a LIF.
What is a LIRA? What is a LIF?
This is why you need this post: everything you need to know about LIRAs and LIFs as you enter retirement to be tax-savvy.
What is a LIRA?
At the foundational level, it’s like an RRSP but locked-in hence the name.
A LIRA stands for “Locked-In Retirement Account”.
With a few exceptions, you can’t withdraw money from your LIRA before you retire. It’s not really possible to add more to this account either.
LIRAs are actually hard to come by. You can’t get a LIRA unless one of the following occurs:
- You have a workplace pension plan and you move jobs (voluntarily or involuntarily), your pension money from your former employer’s pension plan goes into a LIRA. If you have a LIRA it’s because you were part of a pension plan with a previous employer, OR
- You receive money from your former spouse’s employer pension plan, during the division of assets when you divorce, for example.
Is a LIRA different than an RRSP?
Yes but also no.
You know that saving for retirement using a Registered Retirement Savings Plans (RRSP) can be a very common approach. Hint: a reminder to check our comprehensive RRSP post!
Everything you need to know about RRSPs.
The “yes” side of this equation is that the RRSP is a tax-deferred savings plan designed to help Canadians save for retirement. Contributions to an RRSP are voluntary. There are maximum RRSP contribution limits. While there is no tax on the growth of the investments inside the RRSP, tax is however paid when money is withdrawn from the RRSP or its future-state successor, the RRIF.
A LIRA is similar in that it allows you to transfer the funds accumulated in a former employer’s pension plan to an individual, tax-sheltered plan. The challenge with the LIRA is you can’t really make contributions to this account or withdraw money from it before retirement*
*There are however some cases instances/cases that can apply to financial hardship.
The upside though is, once you’ve converted your employer pension to a LIRA, you can have full control over the investments inside the account like an RRSP. So, if you leave your job for a new one whereby you had a workplace pension (or if you, unfortunately, get laid off from work), that workplace pension will be converted to a LIRA. This makes a LIRA an account for the accumulation of pension money outside a pension plan. When you leave your employer prior to retirement, you will be given an options package from the pension plan administrator. You may have the choice to move the money into a personal plan but any locked-in portion of the pension must go into a LIRA.
Differences and similarities between LIRAs and RRSPs
Here are some key differences between LIRAs and RRSPs:
- LIRAs hold pension money. Because LIRAs hold pension money, you cannot make direct contributions (or withdrawals) from a LIRA.
- With LIRAs, you are restricted on withdrawals and there are no big lump sum withdrawals from LIRAs like you can do with an RRSP. If you want money from a LIRA, generally speaking, you must move the money into a Life Income Fund (LIF) or Life Annuity. More on that in a bit!
- LIRA money is not eligible for the Home Buyers’ Plan or the Lifelong Learning Plan. RRSP funds are!
- LIRAs are guided under pension law, which is provincially regulated. As a result, the rules do differ from province to province. We’ll share a link on that soon.
Here are some key similarities between LIRAs and RRSPs:
- Fundamentally, as we referred to above, as long as assets stay within the LIRA or RRSP, there is no taxation. Tax is however payable on the withdrawals or income generated as part of future LIRA conversions (i.e., LIRA to LIF) or RRSP withdrawals or conversions to a RRIF, as an example.
- You can hold stocks, bonds, ETFs, GICs and much more in a self-directed LIRA or self-directed RRSP.
So how do you withdraw money for a LIRA – An intro to a LIF!
From a tax perspective, very carefully! Kidding aside, LIRA assets should stay put until you have a well-thought-out retirement plan. However, you can withdraw assets before any traditional retirement age.
To withdraw money from your LIRA before age 65, consider the following:
- Open a Life Income Fund (LIF) depending on your age, provincial criteria, which is like a Registered Retirement Income Fund (RRIF).
- Transfer money from your LIRA to your LIF.
- Withdraw the maximum allowed by law. Note: the maximum will depend on several criteria, such as your age. We’ll provide a table below.
- Next, invest your savings inside the RRSP or Tax-Free Savings Account (TFSA) for tax efficiency.
- Close your LIF.
- Transfer the balance into a new LIRA before the end of the year.
- Repeat these steps each year to access an additional portion of your retirement savings.
That’s a lot of steps but it can work for some.
Why transfer money from a LIRA to a LIF?
- There’s a maximum limit you can withdraw from your LIF each year because it was designed as named to be a “life income fund”. That maximum income stream varies depending on the account balance and your age, as well as a factor determined by the government. It’s impossible to predict with complete accuracy what your maximum withdrawal will be from one year to the next but the withdrawal table by province can help.
- There is also a minimum annual withdrawal, which changes depending on your age. This mandatory minimum is calculated using the same method as the annual minimum withdrawal for an RRIF.
- Like an RRIF, income is only taxed when you receive income.
- With both the LIF and RRIF, you can also invest in many different types of investments, like GICs, bonds, mutual funds, stocks, etc.
So, the biggest difference between a LIF and a RRIF is that the LIF not only has a minimum income but also a maximum income that prevents you from spending the money too quickly. So, you can’t deplete the LIF account quickly. Again, a LIF was purposely designed with “income for life” in mind.
LIF Minimum and Maximum Withdrawal Table for 2021:
| Age as at: Jan 1, 2021 | Minimum Withdrawal | Maximum Withdrawal ON, NB, SK NL, BC, AB | Maximum Withdrawal QC, MB, NS | Maximum Withdrawal Federal/PBSA |
|---|---|---|---|---|
| 50 | 2.50% | 6.27% | 6.10% | 3.92% |
| 51 | 2.56% | 6.31% | 6.10% | 3.95% |
| 52 | 2.63% | 6.35% | 6.10% | 3.99% |
| 53 | 2.70% | 6.40% | 6.10% | 4.03% |
| 54 | 2.78% | 6.45% | 6.10% | 4.07% |
| 55 | 2.86% | 6.51% | 6.40% | 4.11% |
| 56 | 2.94% | 6.57% | 6.50% | 4.16% |
| 57 | 3.03% | 6.63% | 6.50% | 4.21% |
| 58 | 3.13% | 6.70% | 6.60% | 4.27% |
| 59 | 3.23% | 6.77% | 6.70% | 4.33% |
| 60 | 3.33% | 6.85% | 6.70% | 4.40% |
| 61 | 3.45% | 6.94% | 6.80% | 4.47% |
| 62 | 3.57% | 7.04% | 6.90% | 4.55% |
| 63 | 3.70% | 7.14% | 7.00% | 4.64% |
| 64 | 3.85% | 7.26% | 7.10% | 4.74% |
| 65 | 4.00% | 7.38% | 7.20% | 4.85% |
| 66 | 4.17% | 7.52% | 7.30% | 4.97% |
| 67 | 4.35% | 7.67% | 7.40% | 5.11% |
| 68 | 4.55% | 7.83% | 7.60% | 5.26% |
| 69 | 4.76% | 8.02% | 7.70% | 5.44% |
| 70 | 5.00% | 8.22% | 7.90% | 5.63% |
| 71 | 5.28% | 8.45% | 8.10% | 5.85% |
| 72 | 5.40% | 8.71% | 8.30% | 6.11% |
| 73 | 5.53% | 9.00% | 8.50% | 6.41% |
| 74 | 5.67% | 9.34% | 8.80% | 6.76% |
| 75 | 5.82% | 9.71% | 9.10% | 7.17% |
| 76 | 5.98% | 10.15% | 9.40% | 7.64% |
| 77 | 6.17% | 10.66% | 9.80% | 8.19% |
| 78 | 6.36% | 11.25% | 10.30% | 8.83% |
| 79 | 6.58% | 11.96% | 10.80% | 9.58% |
| 80 | 6.82% | 12.82% | 11.50% | 10.48% |
| 81 | 7.08% | 13.87% | 12.10% | 11.59% |
| 82 | 7.38% | 15.19% | 12.90% | 12.97% |
| 83 | 7.71% | 16.90% | 13.80% | 14.74% |
| 84 | 8.08% | 19.19% | 14.80% | 17.11% |
| 85 | 8.51% | 22.40% | 16.00% | 20.42% |
| 86 | 8.99% | 27.23% | 17.30% | 25.40% |
| 87 | 9.55% | 35.29% | 18.90% | 33.69% |
| 88 | 10.21% | 51.46% | 20.00% | 50.26% |
| 89 | 10.99% | 100.00% | 20.00% | 100.00% |
| 90 | 11.92% | 100.00% | 20.00% | 100.00% |
| 91 | 13.06% | 100.00% | 20.00% | 100.00% |
| 92 | 14.49% | 100.00% | 20.00% | 100.00% |
| 93 | 16.34% | 100.00% | 20.00% | 100.00% |
| 94 | 18.79% | 100.00% | 20.00% | 100.00% |
| 95 | 20.00% | 100.00% | 20.00% | 100.00% |
Source: https://lifeannuities.com/articles/2021/2021-lif-withdrawal-rates.html
Do I have to transfer money from a LIRA to a LIF?
Nope!
You have other options. Instead, you could also opt for a life annuity. Like a LIF, the objective of a life annuity is to provide a regular income – for life. However, there are some major differences between these two investment vehicles. We like the LIF option the best because you can choose the investments you want. Once a life annuity is established, this is a fixed contract, and less flexible.
There is also a third option to consider which is doing a bit of column A and column B: you can turn part of your LIRA into a LIF and part into a life annuity.
Personally, nothing against life insurance companies really, but we believe at Cashflows & Portfolios a LIF is the most flexible option. No matter which option you choose, like an RRSP, your LIRA will turn into a pumpkin eventually – you must turn your LIRA into a LIF or life annuity no later than December 31 of the year in which you turn 71 years old.
I’ve heard about “unlocking” your LIRA – can I do that?
It depends – on the province you live in fact. Some provinces allow the “unlocking” of all or a portion of a LIRA, LIF or LRIF under certain circumstances.
In addition, depending on your province, you might be able to “unlock” 50% of your LIRA with no limits. Thankfully, Ontario has that regulation and I (Mark) intend to take advantage of that when the time comes!
Individuals 55 or older will be entitled to a one-time conversion of up to 50% of holdings value into a tax-deferred savings vehicle with no maximum withdrawal limits. If the funds are transferred to the locked-in fund’s owner’s own RRSP or RRIF, this does not require contribution room, and the owner is not taxed until the funds are later withdrawn from the RRSP or RRIF.
Our tax-savvy friends at Taxtips.ca have an entire page dedicated to this subject, including all the provincial regulatory bodies linked, so you can find out about the “unlocking” restrictions where you live. (We love that site by the way.)
You can likely appreciate by now that any “unlocking” ability is a great way to increase financial flexibility. You can withdraw your retirement savings where permitted to be tax-efficient.
Can I use my (younger) spouses’s age to convert from a LIRA to LIF?
Our understanding is “no”.
The formula for calculating a minimum LIF payment is the exact same method as RRIF payments – for you only. That means: under 71 at the beginning of the year the formula is 1÷(90 – your current age).
For those 71 and older, the minimum withdrawal is based on a percentage of your LIF assets. These percentages were established by the government, and increase with your age.
A LIF follows RRIF minimum withdrawal rules – see above.
The funds withdrawn from a LIF are considered income and you will have to pay tax on them at your marginal tax rate. You will receive a T4-RIF from the financial institution holding your LIF account that will show the amount of the withdrawal.
You cannot use your spouse’s age to determine LIF minimum payments.
What if my pension is federally managed?
How true – some company pension plans are legislated federally, which means that your LIRA will follow the guidelines governing federal pension plans, and not any specific province.
Federally legislated plans are typically transferred into a locked-in RRSP, which is just another version of a LIRA.
Under federal guidelines, some “unlocking” scenarios above may also exist. Make sure you take your pension administrator for details.
Everything you need to know about LIRAs and LIFs summary
If you left a company and had a workplace pension before retirement, chances are you had to move the money into a Locked-In Retirement Account (LIRA). That’s because both the federal and provincial governments do not permit you to convert your pension into cold hard cash – dang!
Instead, LIRAs are designed for the accumulation of money that originated from a pension plan – either a Defined Benefit (DB) Pension Plan or a Defined Contribution (DC) Pension Plan.
While LIRAs do not allow for any lump sum withdrawals, you can open a LIF or life annuity (or a bit of both!) to get your income from it.
While the rules will vary from province to province, you can get money out of your LIRA at certain ages and via one or more of the following methods/situations:
- If you have a reduced life expectancy.
- If your province allows for one-time unlocking of 50% of LIRA to a regular RRSP.
- If you are now unemployed or have low income/financial hardship.
- If you unlocking a small account balance – related to a % of Yearly Maximum Pensionable Earnings (YMPE).
- If you become a non-resident.
When you eventually need to move from the simple asset accumulation phase to the puzzle that is asset decumulation, opening a LIF from your LIRA might be one of your best options. This way, you can convert LIRA money to an income stream designed for life, you are only taxed when you receive the income, and depending upon where you live, you might have some flexible options to “unlock” your LIRA. Take the latter option when you can!!
Need help understanding the LIF or asset decumulation puzzle?
Knowing how to demystify the retirement income puzzle is not trivial work but it’s absolutely something we can help with. If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved to spend for your retirement income plans, we’re here to help answer those questions and more!
If you are interested in obtaining private projections for your financial scenario, check out our new retirement projections service.
Thanks for your ongoing readership and for sharing this site with others. We feel our site and services are totally unique in Canada and we appreciate all the feedback!
Further Reading:
Hi Gents,
Great article as always. I understand that a DCPP converts to a LIF at retirement? I dont think a LIRA or RRIF are options. At least in Ontario.
Thanks
Thanks Chuck!
Yes, for the most part, a DC does become a LIRA to LIF. Meaning, if you belong to a defined contribution (DC) or related money purchase plan, the full market value of your entitlement can be transferred to a personal LIRA. The advantage of this is that it will provide you with full and direct access to a more diverse range of investment options – see post 🙂
However, if you belong to a defined benefit pension plan, the transfer to a LIRA is not as straightforward. There can be a maximum transfer value, etc. to navigate.
See this My Own Advisor post for details!
https://www.myownadvisor.ca/should-i-take-the-commuted-value-of-my-pension/
Depending on the province, there are many terms used including LIRA, Locked-In RRSP, etc. It’s sadly from a regulatory point of view very messy. LIRAs are subject to provincial jurisdiction and regulation for funds legislated in: Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, and Newfoundland.
Hope that helps!
CAP
Okay, I thought it went directly to a LIF. I will research more
Thanks again
I haven’t gotten my pension package yet (I hope work will keep me!) but in that package, for the most part, for any DC it should be going to a LIRA given you have until age 71 whereby you are forced to turn your LIRA into a LIF or life annuity.
Ahhh, got it. So as I will retire at 59 and will have no more contributions to the DC, I must convert to a LIRA. Then later a LIF or annuity when I start to draw income.
Thanks
You got it. LIRA once you voluntarily or involuntarily leave the organization and then LIF occurs, to get your $$ out the LIRA.
Consider LIRA like a pension outside the pension plan – you own it and can manage the assets yourself. 🙂
Good summary. I will need to review some our LIRA considerations more. The opening of a LIF, withdrawing min/max and then opening another LIRA before 65 is a new strategy that I have not heard about. Is there a government link that I can refer to find out more info on this?
My immediate question, which I think has been touched on under RRSP/RIF either under C&P or MOA, is there an ideal time of the year to withdraw funds whether LIF or RIF? For an extreme example, what are the pros and cons of withdrawing on January 1st or December 31st (providing all necessary paperwork is done with your financial institution? Is there a strategy to optimize investments in your LIF/RIF to ensure they are healthy and draw down the min (max for LIF) amounts?
R&P
You mean having two (2) LIFs R&P?
We believe you can if that is your question just you can have two RRSPs, two RRIFs, etc. We don’t have any personal experience with that though. Here’s the link to Ontario on LIFs.
https://www.fsco.gov.on.ca/en/pensions/lockedin/faq/Pages/locked-inaccountchanges.aspx
Tons of details there.
The good news is, as far as we know…you can consolidate multiple LIRAs from previous jobs into one LIRA provided if the former employer pensions are in the same provincial jurisdiction. Also, be mindful that for anyone age 55+, once you have reached age 55 in that calendar year you can work with your financial institution to unlock 50% in Ontario as a one-time event. That is tax-smart. The portion will no longer be subject to the LIRA’s maximum withdrawal limits and you can move 50% to your RRSP to better withdrawal management.
I/we wouldn’t advise having too many LIFs or RRIFs – it becomes too much of a headache to track but that’s just us 🙂
re: ideal time??
Based on the client work we’ve done (and my own future plans (Mark)) I believe as soon as possible to help smooth out taxes. So, around your desired retirement age really. We have seen a few clients whereby they “unlock” 50% then start drawing down the LIRA via LIF at minimum withdrawals, slowly, over time with income sprinkled-in from RRSPs, non-reg. etc.
I personally set up my parents with RRIF withdrawals (same as LIFs min. withdrawals really) at the start of the year, such that, any $$$ coming out of RRIF then can be used to fund the TFSA each January/early February if they wanted. I’ve seen other retirees do something similar – take RRIF/LIF income at the end of the year, (early December) and that also can fund the TFSA early next year if they chose. This way, they draw down the RRIF/LIF and any money not needed funds the tax-free TFSA for estate planning, other. It really all depends on your personal income needs and wants as you well know. No right or wrong. The benefit of annual withdrawals is that money remains to grow and compound tax-deferred inside the RRIF or LIF.
Something to consider 🙂
CAP
Hello CAP,
Thanks for the great information!!
After many years of long term employment at the same company, I have a large DCPP held through my employer with one of the major Canadian 3rd party financial services companies. Although I have the ability to select investments from various mutual funds, the fees on these funds are ridiculous and I have no access to purchase ETFs or stocks. Have you ever heard of a transfer from a DCPP into a self-directed LIRA held at another institution, but WITHOUT having to terminate employment or exit the DCPP?? It is a % matching DCPP, so I don’t necessarily want to forfeit my employers matching contribution
Hi Ed,
Yes, some fees by some funds are pretty much ridiculous!!
To answer your question, I’m not sure you’ll be able to do that – you would need to discuss with your DCPP administrator if that’s an option without having to terminate (voluntarily or involuntarily)! A matching DCPP is outstanding for the most part (re: free money) so do consider that a bonus to help you overcome some bad money management fees to own some products that you don’t have much choice in.
You can also consider talking to your DCPP administrator about any lower-cost options available and taking a bit more equity risk on the personal side. For example, one consideration is to keep a higher % of fixed income associated with the DCPP and go closer to 100% equities with your personal portfolio. This way, some of those fixed-income investments inside your DCPP might be lower cost AND you can use your DCPP bias to fixed-income as part of your overall asset allocation.
Not advice of course but something to consider.
Thanks for your readership.
CAP
Hi Ed,
I am in the same position. DCPP with same employer, matched for 34 years! In my opinion you should leave it until you retire (imminent for me).
4% of my income matched by employer has created a sizeable next egg. Fees aside it has been a godsend. I know my employer negotiated fees with the Pension company with the threat of moving the many millions of dollars held. It worked. Maybe suggest that to your employer.
Good luck
Fair point Ed. Keeping your DCPP is an option with your employer. I know I’ve considered it for my wife but as an early retiree (soon? 3-4 years) I believe I will have more flexibility to move my wife’s DCPP to LIRA > LIF eventually including 50% one-time LIRA to RRSP unlocking power.
If you have a 4% matching, that is considerable 🙂
Good negotiation on your part Ed!!
CAP
Good article, as a lot of people don’t understand what happens with their DBPP when they choose to take the commuted value or transfer value, so thanks for spreading the word.
For federally regulated LIRAs / LRSPs, there doesn’t seem to be any age minimum to convert it to a LIF. So for example if you are a “FIRE” seeker and planning to retire in your 30s out of a job that had a federal pension, then you could convert to a LIF in a low-income year and use it as part of your income stream.
The value of doing this is:
1. To be able to use some of your money as cash flow, knowing it won’t run out because you are limited by how much you can pull; and
2. Avoiding a ballooning LIRA/LRSP balance that could negatively impact your tax and benefit situation later in life when you are forced to withdraw greater and greater amounts.
Being able to withdraw and reduce this as early as possible while in a low tax bracket is part of my own early retirement strategy. My wife and I converted our LIFs at ages 33 and 38….and while the percentage is not high, it’s not insignificant and will help us in the long term.
If you’re curious about this strategy, I wrote a bit more about this strategy here: https://onfilandtime.com/20210713/earning-an-income-from-your-locked-in-pension
Thanks Kevin – very good post yourself and good information.
We agree that looking into the transfer value is smart. I had a post on My Own Advisor about commuted values actually since I had a reader question about it.
https://www.myownadvisor.ca/should-i-take-the-commuted-value-of-my-pension/
The ability to leave any company, take the DB assets and move into LIRA or other is huge I believe since it eventually becomes that LIF / “life income”.
While any “avoiding a ballooning LIRA/LRSP balance” could be an issue – it’s a nice problem to have 🙂
Congrats on your FIRE/early retirement success – kudos!!
CAP
Hi CAP,
Great post and discussion.
When I turn 55, can I actually opt to take 50% out of my LIRA and place it into a Spousal RRSP where the annuitant is my wife? Or does it have to go to the Spousal RRSP where I am the annuitant?
Individuals 55 or older will be entitled to a one-time conversion of up to 50% of holdings value into a tax-deferred savings vehicle with no maximum withdrawal limits. If the funds are transferred to the locked-in fund’s owner’s own RRSP or RRIF, this does not require contribution room, and the owner is not taxed until the funds are later withdrawn from the RRSP or RRIF.
Most welcome!
Depending on the province (e.g., Ontario), you can unlock 50% of LIRA once LIF established. One article of many beyond us 🙂
https://www.canadalife.com/investing-saving/retirement/pension-plans/locked-in-retirement-account-lira/when-can-you-unlock-lira.html
https://www.osfi-bsif.gc.ca/Eng/pp-rr/faq/Pages/unl-dbl.aspx
My understanding, but would need to double-check, is that any unlocking must be attributed to the RRSP account owner.
Correct: you do not need RRSP contribution room for unlocking LIRA to LIF $$ 🙂
https://www.taxtips.ca/pensions/rpp/unlocking-locked-in-pension-accounts.htm
CAP