What Is a Locked-In Retirement Account (LIRA)?

What Is a Locked-In Retirement Account (LIRA)?

Let me explain what a Locked-In Retirement Account, or LIRA, really is. It's a type of registered pension account here in Canada that doesn't allow you to pull out money before retirement, except in rare cases. These accounts are specifically meant to safeguard pension funds for people who've left employer-sponsored plans or fit certain other criteria, holding onto those funds until you hit retirement age.

Key Takeaways on LIRAs

A LIRA gets its funding solely from transfers of money from an employer-sponsored pension plan, belonging to the account's beneficiary. Those funds stay tax-sheltered and locked away until you retire. When that time comes, you can move the money into another retirement fund or use it to buy a life annuity. Also, keep in mind that federal pension laws oversee a similar setup called a locked-in Registered Retirement Savings Plan, or locked-in RRSP.

Understanding Locked-In Retirement Accounts (LIRAs)

Think of an LIRA as a tax-deferred retirement account that protects money rolled over from an employer pension plan, similar to how a 401(k) rolls into an IRA in the U.S. You can't add any new contributions to it—it's only funded through that transfer. You're allowed to move money from an employer pension to an LIRA only in specific situations, like if you've left your job, if the funds are split in a divorce, or if they're inherited after the beneficiary's death.

While the funds are locked in, you can't make cash withdrawals, though unlocking might be possible in emergencies. Later on, those pension funds in your LIRA can go toward buying a life annuity or transferring to a life income fund (LIF) or locked-in retirement income fund (LRIF), or even a mix. Once you reach retirement age, that annuity, LIF, or LRIF will give you a lifetime pension. Unlike a regular RRSP, which you can cash out whenever you want, an LIRA doesn't offer that flexibility.

One note: if your employer pension falls under federal jurisdiction instead of provincial, your money goes into a locked-in RRSP rather than an LIRA. They function pretty much the same way.

Government Requirements for LIRAs

LIRAs are regulated by provincial pension laws, so every locked-in pension has to follow the rules of the specific province. For instance, according to the Québec government, unlike an RRSP, your LIRA funds are locked in and can only provide retirement income—you can't withdraw them except in permitted refund situations. You can hold an LIRA until December 31 of the year you turn 71, and before then, transfer it to another LIRA if you switch financial institutions. You might even transfer a LIF back to an LIRA to delay retirement income payments. Check the list of approved financial institutions for available transfer options.

Rules for unlocking LIRA funds vary by province, with allowable reasons including low income, risk of foreclosure or eviction, first month's rent and deposit, high medical or disability expenses, shortened life expectancy, or leaving Canada permanently. In some provinces, if you're 55 or older, you can unlock up to 50% once. Small balances below a certain threshold can also be unlocked. If you need early access to your LIRA money, talk to a financial advisor familiar with your province's rules, especially for larger amounts.

How Are Locked-In Retirement Accounts (LIRAs) Taxed?

The money inside your LIRA grows tax-deferred until you withdraw it, just like other retirement accounts.

Where Can You Buy a Life Income Fund (LIF) or a Locked-In Retirement Income Fund (LRIF)?

You can get LIFs and LRIFs from banks, credit unions, trust companies, or insurance companies, but the institution has to be on your province's approved list for handling locked-in fund transfers.

What Is a Life Annuity?

A life annuity is basically an insurance contract that guarantees you income for life, usually in exchange for a lump-sum payment.

The Bottom Line

In summary, a LIRA lets you hold onto money transferred from an employer-sponsored retirement plan while keeping its tax-deferred status intact. These accounts follow provincial laws and can only be set up under particular conditions. When you retire, you can shift the funds to something that provides steady lifetime income.