LIRA stands for Locked-In Retirement Account and is an account you open to transfer an employer pension to after you leave a job.
LIRAs are becoming increasingly popular as people tend to job hop more than ever. Gone are the days when you worked for one company for your entire life and collected your pension until death! Now it’s possible you work for a number of employers, some with pensions and some without. As a result, you might end up with a Locked-In Reitrement Account. Here’s how they work!
What is a LIRA?
A Locked-In Retirement Account (LIRA) is a savings and investment account where you can transfer an employer pension after you leave a job. Once you transfer money to a Locked-In Retirement Account, the funds are “locked-in”. You can’t make additional contributions or make any withdrawals until retirement.
You can’t open a LIRA with a financial institution unless you’re transferring funds out of an employer pension. If you want to open an account to save for retirement, the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are your best options.
If you never have a job with pension (or you never leave your job with a pension) you’ll probably never have a LIRA. However, if you are one of the lucky few that worked for an employer with a pension fund and you left your job, you might be wondering what to do with the money.
Should I transfer my employer pension to a LIRA?
When you leave an employer that’s provided you with a pension, you will likely be allowed to make a choice between one of three options:
- Leave your money invested in the company pension and receive a monthly payment from the fund in retirement
- Transfer your money to a new employer pension if you have one
- Transfer the money out of the pension and into a LIRA account
Which option is best for you depends on a few things. The major deciding factor is your preference for managing your own financial assets. If you want to be in control over your own financial destiny, you should probably choose a LIRA over leaving your cash invested with your employer!
When I left a 1-year contract with a pension, they offered to let me keep my money in the pension fund. I was entitled to a piddly $105 per month in retirement if I did so. I was sure I could do better managing the account on my own. But first, I had to learn what a LIRA even was!
What’s the difference between an RRSP and a LIRA?
The Registered Retirement Savings Plan (RRSP) and Locked-In Retirement Account (LIRA) are strikingly similar. Both are designated retirement savings accounts where the balance grows tax-deferred until retirement. However, the LIRA is considerably less flexible than an RRSP in terms of contributions and withdrawals.
Unlike an RRSP, your contributions to your LIRA are not determined by your income. How much money you contribute to a workplace pension when you’re employed is set by your employer. For me, it was 11% of my gross income per year, but yours may be more or less.
Where can you open a LIRA?
Most financial institutions that offer registered accounts like TFSA, RRSP, and RESPs will also be able to provide LIRAs.
I elected to open a self-directed LIRA with Questrade. I’ve been a self-directed investor for a decade, and I love being in control of my investments. I am confident in the stock market and feel more comfortable managing my money than turning it over to someone else. I feel comfortable buying and selling stocks and ETFs, and I know I can grow my LIRA to a comfortable sum in retirement.
If you’re less sure of your own investing skills, a great place to open a LIRA is with a robo-advisor. Wealthsimple offers Locked-In Retirement Accounts, and they’ll do all the investing legwork on your behalf.
Whatever you choose, it’s imperative that you invest your LIRA in the stock market. Don’t leave those dollars languishing in a savings account! You need them to grow so they can provide financial security in retirement.
Can you contribute to a LIRA?
Nope. Unlike the RRSP, you cannot make contributions to a LIRA. The only way to get money into a LIRA is to transfer it from a pension fund you’ve paid into after you’ve left that employer.
Once the funds from your pension are in your LIRA, you cannot make any additional contributions. You have to rely on the account to grow through interest, dividends, and capital gains. How much is in your Locked-In Retirement Account by the time you retire depends on your investing savvy and how the stock market performs.
When can you take money out of a LIRA?
This is the bad news: you cannot take money out of a LIRA until retirement. Unlike the RRSP, you do not have the option to make a withdrawal early and simply take a tax hit. You also can’t use the funds under any special provisions like the First Time Home Buyer’s Plan or the Lifelong Learning Plan.
Making a withdrawal due to financial hardship
There is one exception that may allow you to withdraw from your LIRA before retirement: financial hardship.
The things that typically constitute financial hardship and may allow you to access funds in your LIRA include:
- you’re at risk of eviction from your primary residence due to overdue rent
- you need funds to pay first and last month’s rent on a new residence
- you’re at risk of a foreclosure on the mortgage of your principal residence
- you have high medical or disability-related costs
- you need make alterations to your principal residence to accommodate your disability
Boomer & Echo have a great post about unlocking funds from a LIRA due to financial hardship here.
Making withdrawals in retirement
Surprise: you can’t actually withdraw from a LIRA! When they say locked-in, they REALLY mean locked-in. Instead, when you reach retirement, you’ll have to convert your Locked-In Retirement Account (LIRA) to a Life Income Fund (LIF).
Converting a LIRA to a LIF
Once you reach retirement age, or close to it, you can convert your Locked-In Retirement Account into a Life Income Fund. You can turn your LIRA into a LIF as early as age 50, but you absolutely must do it by December 31 of the year you turn 71.
A Life Income Fund (LIF) is very similar to a Registered Retirement Income Fund (RRIF). Once you convert your LIRA into a LIF, you must begin making withdrawals in the subsequent year. LIFs have minimum withdrawal percentages that increase as you age.
Withdrawals from your LIF will be taxed as income during retirement.
How I accidentally ended up with a Locked-In Retirement Account
I recently completed a contract for a start-up incubator associated with a university. Despite it being a temporary position, the 1-year term and management title meant I was considered staff and enrolled in the University pension plan.
A whopping 11% of my pay was deducted from each paycheque and placed in the pension plan. I thought nothing of it, figuring this was simply forced savings I would transfer to my RRSP when my contract ended. However, when I left, I learned I couldn’t transfer everything I had saved to an RRSP. It had to go to a LIRA.
Alternatively, I could leave the cash in the company pension fund and I would receive $105 per month in retirement.
While I’d heard of Locked-In Retirement Accounts before, it was a financial acronym I ignored because it never applied to me. Now I suddenly had an $11,000 balance that could only be placed in that type of account. Thankfully, both Boomer & Echo and Money We Have were available to offer some insight into how the account works.
Final thoughts on LIRAs
By my calculations, my $11,000 LIRA should grow to $71,000 by the time I retire assuming a 6% return over the next 32 years. That’s not too shabby as a retirement nest-egg for a 1-year contract in my 30’s!
Based on the 4% withdrawal rule, I should be able to safely withdraw $2,840 per year from that $71,000 without depleting the principal. This works out to $236 per month, or a full $131 more than I would have received had I left my money in the company pension!
For me, it was definitely worth it to transfer my money from my company pension to a LIRA. It probably is for you, too!
Thanks for the overview. I also have a LIRA which originally was a Defined Contribution Plan with max 4% contribution and employer match. Contributed for 9 years, and was 45K when I left in 2014. Five years later its up to 65K, growing on its own being fully invested in the S&P 500. Approaching 50 in a few years and will have to start thinking about a LIF. In the meantime, will let it grow via capital gains.
Keep up the great work.
A couple things that could be added.
Depending on legislation the rules of withdrawals are different. The legislation can be provincial or federal. If you ever decide to change financial institutions you need to know that
With most legislation if the account is less than a certain amount you can actually unlock the money into your rrsp.
In terms of investing in the stock market only, that would depends on each individuals risk tolerance although the younger you are the more risk you can afford to take. Also someone who is really cautious might be better to leave their pension alone.
Lastly one of the options that is sometimes available is to transfer the pension to your new employers pension plan. If you go from one government level to another that is often possible.
It already says in the post there may be an option to transfer to a new employer’s pension plan. Of course the stock market depends on the risk you can take, but anyone who has not yet retired can (and should) invest in the stock market.
I understand there are provincial rules and additional regulations, which is why I linked government resources that cover this in depth to avoid writing a 3,000+ word post.