What Is a Locked-in Retirement Account?
A Locked-in Retirement Account (LIRA) is a type of registered pension account in Canada that does not permit withdrawals before retirement except in exceptional circumstances. Locked-in Retirement Accounts are designed to hold pension funds for former employer-sponsored plan participants and certain others until they reach retirement age.
- A Locked-in Retirement Account (LIRA) is a Canadian pension savings account funded by money transferred over from an employer-sponsored pension plan by the account's beneficiary.
- The funds are tax-sheltered and cannot be withdrawn until retirement.
- At retirement, the money in a LIRA can be transferred to another retirement fund or used to purchase a life annuity.
- Locked-In Retirement Accounts are governed by provincial pension laws.
- Federal pension laws govern a similar type of account known as a locked-in Registered Retirement Savings Plan.
Understanding the LIRA
A LIRA is a tax-deferred retirement account used to shelter money transferred in from an employer-sponsored pension plan, much like a 401(k)-to-IRA rollover in the United States. A LIRA can only be funded in that way, and you cannot make additional contributions to it.
Transferring money from an employer pension into a LIRA is allowed only under certain circumstances. For example, the beneficiary may have left the employer, the pension funds may be have been divided up with a former spouse as the result of a divorce settlement, or the beneficiary may have died, leaving the money in their pension to an heir.
Cash withdrawals are not permitted while the funds are locked in, although the account may be unlocked under certain emergency circumstances. Pension funds that are transferred to a LIRA can later be used to purchase a life annuity or can be transferred to a life income fund (LIF) or a locked-in retirement income fund (LRIF) or some combination of those.
Once the account's beneficiary reaches retirement age, the life annuity, LIF, or LRIF will provide them with a pension for life.
A Registered Retirement Savings Plan (RRSP) (except for the locked-in kind) can be cashed in at the owner's discretion. The LIRA does not have such an option.
If the employer pension plan is under federal, rather than provincial, jurisdiction, the participant's money would be transferred into a locked-in Registered Retirement Savings Plan (also known as a LRSP), rather than a LIRA. The two are very similar in the way they work.
Government Requirements for LIRAs
LIRA plans are governed by provincial pension laws. Every locked-in pension must comply with the laws of a specific province.
According to the Québec government website, for example:
Unlike an RRSP, the funds in a LIRA are locked-in and can only be used to provide a retirement income. Thus, the amounts cannot be withdrawn, except under certain circumstances in which a refund from your LIRA is permitted. Like an RRSP, you can hold a LIRA until Dec. 31 of the year in which you reach age 71. Before that date, you can transfer your LIRA to another LIRA, for example, if you change financial institutions. You can also transfer your life income fund (LIF) to a LIRA, in particular when you want to postpone payment of a retirement income. Consult the list of financial institutions offering LIRAs or LIFs to find out what transfer instruments are available.
Depending on the province in which the plan owner lives, there can be different rules on how to unlock locked-in pension funds. The allowable reasons for unlocking a LIRA may include low Income, potential foreclosure, eviction from a rental, first month’s rent and security deposit, high medical or disability costs, shortened life expectancy, and permanent departure from Canada.
Unlocking 50% of a LIRA can be done one time if you are 55 or older in some provinces. Small balance unlocking is allowed if the balance is under a certain amount.
If you need to take money from a LIRA before it would normally be allowed, it's best to consult a financial advisor who knows the rules that apply in your province, especially if the amount involved is substantial.
How Are Locked-in Retirement Accounts Taxed?
The money in a locked-in retirement account continues to grow tax-deferred until it is withdrawn.
Where Can You Buy a LIF or a LRIF?
Life income funds (LIFs) and/or locked-in retirement income funds (LRIFs) are available from banks, credit unions, trust companies, and insurance companies. The financial institution must be on the province's approved list of institutions to accept transfers of locked-in funds.
What Is a Life Annuity?
A life annuity is an insurance contract that provides a guaranteed income for life, typically in return for a lump-sum payment.
The Bottom Line
A Locked-in Retirement Account (LIRA) can be used to hold money transferred out of an employer-sponsored retirement plan without losing its tax-deferred status. LIRAs are governed by provincial law and may be opened only under certain circumstances. At retirement, the account beneficiary can transfer the money to any of several types of accounts that will provide them with a regular income for life.