Locked-in Retirement Account or LIRA

Chances are, that if you are nearing retirement age in 2019, you may have had the privilege of receiving a pension from your employer. Now seen as a financial unicorn for new grads entering the workforce, at one time it was commonplace for employers to offer a pension plan. With so many baby boomers invested in pension plans there can be a lot of confusion on what to do once you switch jobs and near retirement age. Gone are the days where pension plans are commonplace, but there is still a lot of misinformation when it comes with what individuals can do with those pension plans and how they can most effectively use them.

A Locked-in Retirement Account (LIRA) is an investment account where pension funds are deposited once an individual leaves a company, voluntarily or not. As the name suggests the funds in this account are locked in until the individual retires or reaches a specified age. Unlike the Registered Retirement Savings Plan (RRSP), the funds cannot be accessed*, and they cannot be transferred to a RRSP. Therefore, the LIRA cannot be used for the Home Buyers Plan (HBP), or Lifelong Learning Plan (LLP) that is available with the RRSP. In addition to this, further contributions cannot be made to the LIRA once the pensionable funds have been deposited.

That being said the LIRA does have some similar characteristics to the RRSP, such as the ability to self-manage the investments with your online brokerage account. In addition, the tax treatment is the same as for a RRSP, with the income earned within the account deferred until withdrawal and then taxed at the marginal rate.

Once the holder of the LIRA reaches retirement age there are a few things that can be done with the LIRA. The three most common are: conversion of the LIRA to a Life Income Fund (LIF), a Locked-In Retirement Income Fund (LRIF) or the purchase an annuity. The LIF and LRIF are similar to the Registered Retirement Income Fund (RRIF) and can be done in some provinces as early as 50 (Alberta). The conversion of the LIRA to one of these options must occur by age 71, similar to the rules governing the RRSP. In addition to this there is both a minimum and a maximum amount that you must withdraw from your LIF once it has been converted.

There are a number of restrictions with the LIRA because it is governed by pension laws in each province. Therefore, you are not able to combine LIRAs from different provinces into one investment account. For example, if you worked in British Columbia and received a LIRA from your former employer’s pension plan, and then took a job in Alberta that also paid out your pensionable funds into a LIRA you would not be able to combine them, which is one of the downsides of the LIRA. That being said, you could transfer them both to the same financial institution so that there would only be one place to log in and manage your LIRAs.

Pension splitting is something that individuals can take advantage of with a LIF or LRIF, qualifying as a payment from a registered pension plan. This can be done through the T1032 form, which will need to be filed with your annual tax return.

Overall, there are more restrictions when it comes to utilizing a LIRA, which stems from the fact that these investment accounts are governed by pension laws according to each province. For individuals who have a hard time keeping their hands off their retirement nest egg, a LIRA might just be what they need to ensure they stay financially sound into their retirement years.

Subscriber Q&A

Q: I am 56 years old and my question is pertaining to LIRA and LIF. If I change the LIRA to a LIF, assuming I will be receiving 4000 dollars in income, am I eligible to claim the 2000 dollar pension credit? Also, am I able to income split this with my wife, who turns 55 in 2019? I know you are eligible for the credit at the age of 65 but want to know if you are eligible at age 55, pertaining specifically to a LIF.

A: The pension credit can only be claimed on eligible pension income. To maximize this with a LIRA it will be important to transfer your LIRA to a LRIF or LIF at age 55. From there you will need to ensure that it is in an annuity to ensure that the income is considered eligible pension income. The most important thing here is to ensure you transfer the LIRA before you purchase the annuity. If you purchase it directly from the LIRA it will have similar tax treatment to the RRSP and you will only be able to claim the credit once you are 65. You are able to split the income of the LIF with your spouse on your tax return using the T1032 form.

Q: I understand that LIRAs cannot be combined if they are under the jurisdiction of different provinces. In my case, I have a LIRA from a former Ontario employer’s company pension and a LIRA from a former Alberta employer’s company pension. I want to combine the two accounts but am told I cannot combine such LIRAs from different provincial jurisdictions.

I’d like your views on why combining such LIRAs is not possible. Keeping such LIRAs separate is generally inefficient and not in the best interests of the individual (higher management fees for separate accounts for example). Are there specific structural reasons why such a combination is not possible? Again, I am not referring to unlocking these accounts and transferring them into an RRSP (although that would be even better). Rather, I am interested in combining two LIRA accounts that were set up in two different provinces.

A: Unfortunately, you are not able to combine LIRA from different provinces. This is largely due to the fact that LIRAs are governed by provincial pension laws which differ by province. I agree it can be inefficient to have more than one account, but you might want to consider transferring both LIRAs to the same financial institution to take advantage of better rates or lower fees.

Q: My husband and I are both under 65 years old and retired. We both have LIRAs from previous employers. At what age can we income split?

A: You can split the income of the LIRA once you convert it to a LIF or LRIF and start to pay it out. This can be done using the T1032. The spouse that receives the income must be 65 years of age or older, while the spouse receiving up to 50% of the pension income can be under the age of 65.

*Exceptions can be made in some jurisdictions for critical illness, long periods of unemployment.

Janine Rogan CPA, is a personal finance educator and CPA based in Calgary Alberta. She is passionate about sharing her financial knowledge with Canadians to help educate them to make money-smart decisions. Through her website, Youtube channel, and community engagement Janine shares solid financial advice that will make a difference in how you manage your money.