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!
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 While there is no tax on the growth of the investments inside the RRSP, tax is however paid when money is withdrawn from the RRSP or its future-state successor, the RRIF.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
QC, MB, NS
Do I have to transfer money from a LIRA to a LIF?
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.
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