As a financial advisor, expect that you'll be asked what to do with pension money after a job change, layoff, separation, or death in the family. A locked-in retirement account (LIRA) can be an essential part of your clients' retirement income strategy.
In this article, Wealth Professional Canada will explain what a LIRA is and how it compares with other registered accounts. Looking for the latest LIRA news? Scroll to the bottom of this page and browse the latest updates about LIRA!
A locked-in retirement account is a registered account that holds pension money outside an employer pension plan. When your clients leave a company where they had a pension, they often need a new place to keep those pension assets. One option is to transfer the pension value into a LIRA instead of leaving it inside the old plan or moving it to a new employer pension.
A LIRA is built for retirement savings. The funds are "locked in," which means your clients cannot simply withdraw money whenever they want. The purpose is to preserve pension money until retirement, even if your clients leave the employer long before they stop working.
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Your clients can open a LIRA if they:
A LIRA can receive pension assets after the death of the original owner if the beneficiary needs a place to hold inherited pension money. It can also hold pension amounts awarded to a spouse or common-law partner after a separation or divorce.
A LIRA is not a savings account that your clients add to each year. Instead, it receives a single transfer of pension assets. Once that transfer is complete, no further contributions are allowed. The account can still grow through investment returns and interest, but there is no new money flowing in from your clients' income.
This structure is different from a registered retirement savings plan (RRSP), where your clients can contribute up to an annual limit each year.
Within a LIRA, your clients can usually access many of the same eligible investments that an RRSP offers. Depending on the financial institution, this can include:
Your clients can work with you as their financial advisor or use a self-directed brokerage platform to build a diversified portfolio inside the LIRA that matches their time horizon and risk tolerance.
The defining trait of a LIRA is that the funds are locked in for retirement. Your clients cannot use the money for a home purchase or education. They also cannot pledge the account as security for a loan or mortgage. Until the money is withdrawn as income, it is protected from most creditors and collection actions.
This locked-in structure can be helpful for clients who struggle with the temptation to spend retirement money early. The rules require a long-term view and support the idea that pension assets are meant to fund life after work.
Short answer: no. However, clients can turn it into something else. In the year that they turn 71, they must convert their LIRA into a retirement income arrangement. The two options are:
These are similar in structure to a registered retirement income fund (RRIF) that comes from an RRSP. Conversion is not a choice after a certain age. The Income Tax Act requires that RRSPs and LIRAs be converted into income accounts by December 31 of the year the holder turns 71.
Once the LIRA becomes a LIF, LRIF, or locked-in RRIF, the account switches from savings mode to payout mode. The money stays invested, but your clients must withdraw at least a minimum amount each year.
The minimum is set by formulas that increase as the holder gets older. The purpose is to spread the pension money over the retirement years as a stream of taxable income.
Your clients cannot contribute new funds to a LIF, LRIF, or locked-in RRIF. These accounts only hold assets that came from pension transfers or from the original LIRA.
When your clients leave an employer with a pension, they often face a choice about where to move that pension value. Leaving it in the original pension, transferring it to a new employer pension, or moving it to a LIRA are common options.
The best choice depends on their situation, but understanding what a LIRA offers will help you assess the options with them.
For many people, the strongest benefit of a LIRA is that it preserves pension money in their own name outside the employer plan. This can reduce the risk that changes to the old employer or its pension arrangement will affect their future retirement income.
It also gives your clients and you, as their financial advisor, more say in how the assets are invested. Inside a LIRA, your clients can design a portfolio that aligns with their risk profile instead of relying on the investment policy of an employer pension.
This can be especially helpful for those who want to adjust asset mix as they get closer to retirement.
From age 55 onward, some provinces allow up to 50 percent of a LIRA to be unlocked. In that case, your clients might:
The remaining locked-in portion would stay in a LIRA or move to a LIF at the appropriate time and then pay income based on LIF rules.
The right path depends on your clients' retirement date, tax bracket, and spending needs. Some will prefer to keep as much money as possible inside tax-sheltered accounts, withdrawing only the minimum each year. Others will want access to more cash earlier, especially if they retire before government benefits start.
LIRAs and RRSPs both support retirement savings, but they serve different purposes. One is not automatically better than the other. Instead, they complement each other in a retirement plan.
As mentioned earlier, a LIRA holds pension assets that come from an employer-sponsored plan. No new contributions are allowed.
An RRSP holds personal retirement savings. Your clients can contribute each year within their limit, and sometimes their employer will contribute as well.
If your clients have both a pension and personal savings capacity, they might end up owning both types of accounts.
Are RRSPs different from RSPs? Find out in this article.
RRSPs are more flexible. Your clients can withdraw at any time, although withdrawals are taxable and can influence other income-tested benefits.
Some programs also allow RRSP withdrawals for housing or education, with conditions for repayment. LIRAs are stricter. Withdrawals are restricted until retirement or until specific unlocking rules apply.
For clients who worry about tapping into retirement money too early, the locked-in structure of a LIRA can act as a safeguard. For those who value flexibility and control over timing, RRSPs offer more options.
On the tax side, both accounts allow tax-deferred growth and taxable withdrawals later. RRSP contributions reduce taxable income in the year of contribution, up to a limit. Employer contributions are reported as income on the T4 but receive the same deduction.
LIRA transfers come from pre-tax pension money, so there is no new deduction when the funds move into the LIRA. Growth inside both accounts is not taxed until withdrawal, and withdrawals from RRIFs, LIFs, locked-in RRIFs, or annuities are treated as taxable income.
A LIRA offers a way to hold pension money outside an employer plan while keeping it focused on long-term income. The account supports tax-deferred growth, protects funds from early spending or creditor action, and feeds into structured income products such as LIFs and locked-in RRIFs.
When your clients leave an employer, face a separation, or inherit pension assets, a LIRA is often part of the conversation. Once you clearly explain how this account works, you can help clients see how it can complement RRSPs, RRIFs, and government benefits.
With the right guidance, LIRAs can support stable retirement income and help Canadians stay on track toward their long-term goals.
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