sSome time ago I wrote about my LIRA. No, not some Turkish currency I have lying around the house, but my Locked-In Retirement Account (LIRA).
What is a LIRA and where does it come from?
Recall a LIRA may be better known as a locked-in RRSP. These accounts originate from money held within a company pension plan. As long as you’re employed with that company your money may be invested (and vested) in a defined benefit or a defined contribution plan. When you leave the company you may have the choice to move the money accumulated into a LIRA. That’s what I did almost 10 years ago.
This is one of the main differences between a LIRA and a RRSP:
LIRAs hold pension money and because of this you cannot contribute money to it.
The second main difference is:
With RRSPs, you can take money out when you want (taxes will apply) and there are no limits how much you can take out if you do. With LIRAs, you are restricted on withdrawals.
Only some provinces allow the “unlocking” of LIRA monies. Certain circumstances must apply. Some of those conditions include: small balances in the account, becoming a non-resident of Canada, shortened life expectancy or financial hardship. Taxtips.ca in the past has a great page about LIRAs if you want to know how, or if, you can “unlock” your LIRA.
Managing my LIRA – Update
Back in July, I told you I wanted more U.S. exposure in my portfolio. Since I didn’t own any Coca-Cola (KO:US) yet, I decided it was time to get some. I thought it would be a great idea because:
•Coca-Cola has paid uninterrupted dividends on its common stock since 1893.
•Coca-Cola has increased dividends every year for 48 consecutive years.
•Coca-Cola has an average five-year dividend growth rate of over 9%.
•They have almost $3 billion in cash flow.
•They have a moderate (and sustainable) dividend payout ratio of just over 50%.
•They continue to increase volumes, sales and revenues in emerging markets like China and India year after year.
•Although U.S. based, they are truly an international company.
•When looking at historical data (more than 40 years), Coca-Cola has doubled their dividend payments on average every seven years.
•One of the largest holders of Coca-Cola stock is Warren Buffett – enough said.
While I didn’t consider my Coca-Cola purchase a long-shot by any means, I did have one reservation – I was unsure if there would be U.S. withholding taxes for dividends paid inside my LIRA.
My financial hypothesis and personal research was saying “no”, although I didn’t know for sure. Unfortunately, after talking to at least seven (7) departments and various “tax specialists” at Revenue Canada about this concern and after multiple phone calls and emails to the Financial Services Commission of Ontario office, they didn’t know either. So, I made the transaction based on my own hunch – a LIRA would be treated the same as an RRSP account as they are both considered pension accounts (therefore, no U.S. withholding taxes).
What you should know about U.S. withholding taxes:
1.U.S. stocks held inside your RRSP or RRIF: you pay no withholding taxes (excellent)
2.U.S. stocks held inside your RESP or TFSA: you pay 15% withholding taxes (that stings)
3.U.S. stocks held in unregistered accounts: you pay 15% withholding taxes PLUS tax at your full marginal rate (ouch)
Managing my LIRA – Update
With or without a LIRA as part of your portfolio, I hope you’re putting your U.S. stocks in the right location. I learned something new and by reading this post, I hope you did too. Holding your U.S. stocks in various financial accounts definitely has tax implications – implications you should know about. As a DIY investor, I’m learning those tax laws more and more and trying to use that knowledge to my advantage. I hope you are too.
As the old saying goes, if you’re gonna play the game you should probably know the rules 🙂
Mark…. I really appreciate the time you took to respond and most obviously all of the knowledge that you share.
Thank you. Many times.
Yes, WS doesn’t allow trades with a LIRA.
I think I may go for QuestTrade for the set and forget 20 year US ETF LIRA in VOO.
As it is only 25K….. I am not sure how much thought I should put into this,
e.g. using Norbert’s Gambit to get the funds transferred into a USD account
(buying DLR.TO, journalling shares over as DLR.U.TO, then selling them, then buying VOO and leaving them for 20 years ) or if I am overthinking this, and that move is for the larger (<100K) sums to be advantageous on savings.
Obviously the VOO in the LIRA is for low MER, tax efficiency/ avoiding foreign withholding taxes.
But given this is less than 100 K… would I incur significant costs if I just parked it in a Canadian-Listed equivalent (VFV)?
I see pros and cons of course LM.
Gambit for the $25k (for VOO) or just buy VFV as Canadian-listed or something similar. I think Gambit makes sense for a shorter-term time horizon, since some argue the currency hedge/the impacts diminish over time.
So, long-term, with small account values, maybe less reason to hedge but the future is always unknown.
Not tax advice advice or any future predictions here of course 🙂
All the best and thanks for your readership.
48 with a small LIRA (25K)
I was going to use it to invest in the S&P 500,
In VOO. A bit of a Buffet move….just set it and forget it for at least 20 years .
I figure I will use my RRSP (Dividend Aristocrats) and TFSA (more aggressive trading) for Canadian stocks… and this account will be my tax-sheltered US stocks portion of my portfolio .
I can’t figure out how to do this without paying someone.
The DIY investing platforms –
Wealthsimple wont allow you to trade a LIRA. They put it in an ETF of their choice manage it at .05% monthly .
QuestTrade – I can’t get make sense of how I can do this with them yet.
Big bank platforms…not feeling I want to support them .
Have you got any comments on how to DIY a LIRA into a US index fund ?
Thanks so much, LM
Intersting LM – usually any of the big bank brokerages are happy to have you open a LIRA and with > $15,000 often beyond an account minimum there are no account fees.
I would have thought Questrade or WS would be great for you. Questrade should be commission-free although there will be a small deregistration fee at some point – most places do.
I also have an affiliate with Questrade that should provide a $50 credit so you are welcome to use that from my Deals page. Never any obligation.
Same with BMO – use my promo code with them to see if that gets you further ahead?
Smart call on VOO.
I know for a fact that many brokerages will allow you to open a self-directed LIRA and own a U.S index fund there, once you have both CDN $$ and USD $$ money associated with your LIRA. I know many investors do.
Hope that helps!