Managing my LIRA
I could be writing about Italy’s former national currency before the euro took over and what remains the national currency for Turkey, but that’s another post better served by currency analysts. What I’m writing about today is my Locked-In Retirement Account (LIRA), part of my investment portfolio:
-what is it?
-what I did with it recently, and
-what I’m doing with it going forward as part of my retirement strategy.
What is a LIRA and where does it come from?
A LIRA is better known as a Locked-In RRSP. They 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 personal plan. This is what happened in my case. I left my former employer almost 10 years ago and was able to…take the money and run. Problem was, I couldn’t contribute to that pool of money. Too bad too, but it’s the nature of the “locked-in” account.
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.
My LIRA: Then and Now.
Soon after leaving my former employer in early 2001, I invested the money in a dividend growth mutual fund and never looked back. That is until about a year ago. The dividend growth mutual fund performed OK, even after the most recent bear market. I guess I got lucky. After learning more about ETFs, index and dividend-investing in recent years, I decided my dividend growth mutual fund had to go. This year, amongst other portfolio changes, became the year to get my LIRA finances in order.
Early in 2010, I transferred my LIRA account from a mutual fund account into a brokerage account. I was able to make this transfer in-kind, no fees involved. Next, I sold my dividend growth fund. I kept the money for a few months in cash until I saw an opportunity to buy a small portion of XBB with some of the cash. I now hold enough units to provide me about $30/month in dividends. Compare that to the $30/quarter I was getting with my mutual fund, and I know I made the right decision. Additionally, I wanted more U.S.-exposure so I decided to pick up Coca-Cola (US:KO) for my LIRA. Until this transaction, I didn’t own any Coco-Cola stock. KO has paid dividends to investors on its common stock since 1893. I know “historical performance is not indicative of future performance” but heck, hard to argue with that track record.
My LIRA: Going-forward.
In holding some XBB and some Coca-Cola in my LIRA, I figure I’ll have a steady stream of dividends coming in allowing me to buy more shares as I see fit, as the cash accumulates. XBB will provide long-term fixed income stability, Coca-Cola will give me desired U.S.-exposure.
Since I want to keep my dividends as a source of pleasure and not pain, I bought Coca-Cola for my LIRA instead of keeping it unregistered, since there is no withholding tax on U.S. dividends inside an RRSP or LIRA or RRIF. I believe I shouldn’t get hit with U.S. withholding taxes for any U.S. stocks in my LIRA. My financial hypothesis has yet to be validated though. I’ve written and talked to at least seven departments at Revenue Canada about this…with no direct answer yet but the experiment is on and hopefully I am correct. It’s not the end of the world if there are withholding taxes, simply, I’d like to avoid them. I’m optimistic the entire US:KO dividend of $0.44/share will land in my account when the next payment date arrives. I will keep you posted.
Closer to retirement, I’m considering converting my LIRA into another tax-deferred vehicle such as a Life Income Fund (LIF) or a Locked-In Retirement Income Fund (LRIF). An annuity is probably another choice, but I haven’t done tons of research on any of these products yet. I can’t retire tomorrow or next year (sigh…) so I figure I have a few more years of work (and to work) on those retirement options. I’m just glad to have learned what I have in recent years so I can take better control of my finances. I know I might make mistakes, but that’s OK. The more I learn, the more I know and the more I know, the more I can improve.
Do you have a LIRA? If so, how do you manage it?