What is a LIRA and how should you invest in it?

What is a LIRA and how should you invest in it?

Got a Locked-In Retirement Account (LIRA)?

On the cusp on getting a Locked-In Retirement Account thanks to your recent workplace changes?

What the heck is a LIRA and why does investing have to be a bunch of alphabet soup?

All great questions readers.

Thanks to more reader questions, I’ve updated this post recently to highlight what a LIRA is, how you can consider investing in it, and how I’m investing in my LIRA as I consider semi-retirement in the coming years.

First up, what is a LIRA?

At the core, a LIRA is like an RRSP but locked-in hence the name.

A LIRA stands for “Locked-In Retirement Account”.

So, a Locked-In Retirement Account (LIRA) is similar but not the same as a Registered Retirement Savings Plan (RRSP). Sure, they are both designed for investing (you can read up on RRSPs in my 101 post here) but a LIRA differs in how it originates. 

Here is a good comparison table:

	Locked-in retirement account (LIRA)	Registered retirement savings plan (RRSP)
What is it for?	Retirement savings.	Retirement savings, can include housing, education.
How can you get one?	When you leave an employer where you had a pension plan, you can choose to turn it into a LIRA.	Through an employer or your own advisor.
How do taxes work?	Your money won’t be taxed until you withdraw it (after setting up a life annuity or another retirement income product) (e.g., LIF = Life Income Fund)	·       Your contributions (and any employer contributions made on your behalf) are tax-deductible, up to a limit. ·       Your money won’t be taxed until you withdraw it. ·       Employer contributions are treated as taxable income on your T4.
When can you contribute money?	You can’t contribute money, but depending on your plan, you may be able to transfer locked-in funds from another registered plan.	There is an annual limit to the amount you can contribute.
When can you withdraw your money?	When you retire and turn your savings into a retirement income account or annuity.	Depending on the plan and applicable legislation, there are restrictions.
What happens when you retire?	You must turn your savings into your retirement income by Dec. 31 of the year you turn 71.	You must turn your savings into your retirement income by Dec. 31 of the year you turn 71.
Other Reading:	Read on!	Learn more about RRSPs on my site here.

A LIRA is basically designed to hold pension money outside of a pension plan.

In fact, you can’t own a LIRA unless one of the following occurs:

1. You have a workplace pension plan and you move jobs (voluntarily or involuntarily), your pension money from your former employer’s pension plan goes into a LIRA. If you have a LIRA it’s because you were part of a pension plan with a previous employer, OR
2. You receive money from your former spouse’s employer pension plan, during the division of assets when you divorce, for example.

LIRAs are typically established when you leave an organization and you want to take the pension money you’ve accumulated as part of that pension plan with you. If you have a LIRA or you were asked to establish a LIRA, chances are you were part of a company pension plan at some point.

Recall there are two key types of pension plans – defined contribution and defined benefit. If you are fortunate to have a pension plan at work then I would encourage you to find out which one you can contribute to and all the rules associated with it!

Further Reading: Should I take the commuted value of my pension?

Unlike an RRSP, you cannot contribute/add new money to a LIRA*

*There are however some cases instances/cases that can apply to financial hardship. 

Depending on the jurisdiction the pension was registered in, LIRAs can be managed federally or under provincially regulated pension laws. Like an RRSP though, a LIRA can hold you various investment products or securities such as GICs, cash, bonds, stocks, ETFs and more for long-term tax-deferred growth.

On that note, once you’ve converted your employer pension to a LIRA, you can have full control over the investments inside the account like a self-directed RRSP. So, if you leave your job for a new one whereby you had a workplace pension (or if you, unfortunately, get laid off from work), that workplace pension will be converted to a LIRA. 

Second, how do you get money out of the LIRA?

Even though you can’t make withdrawals from a LIRA, you can get your money out at some point. You can also be very tax-efficient about it.

What I mean is, to withdraw money from your LIRA before age 65, consider the following:

1. Open a Life Income Fund (LIF) depending on your age; provincial criteria.
2. Transfer money from your LIRA to your LIF.
3. Make your maximum withdrawals. (See table below.)
4. Next, invest money withdrawn inside Tax-Free Savings Account (TFSA) for tax efficiency.
5. Close your LIF after account depleted. 

Of course, you don’t have to move money from your LIF to your TFSA. You can spend it as you please!

Once a LIRA is converted to a LIF there is very little flexibility on annual withdrawals. Once converted to a LIF there is a minimum withdrawal and a maximum withdrawal range based on your age and the size of the portfolio at the beginning of the year. These min and max withdrawals are slightly different depending on where the LIF is regulated, either provincially or federally.

What is a LIF?

A Life Income Fund (LIF) is a registered account that pays you income from your locked-in pension investments.

A LIF is like a RRIF (Registered Retirement Income Fund) that is meant to provide retirement income throughout your life, so the investments can’t be withdrawn all at one time. LIFs are similar to Locked-in Retirement Income Funds (LRIFs) in that they also give you full control over your investments and
have a minimum and maximum payment, but how the maximum payment amount is calculated is different than with other plans.

In some provinces, you may be required to convert your LIF to an annuity at age 80 as well.

Below is a table that shows the minimum and maximum withdrawal percentages for 2023 by province.

See more of this table after age 71 from this source here:

https://www.empire.ca/sites/default/files/2023-02/INV-996A-LIFMinMaxWithdrawalPercentages-EN-web.pdf

When it comes to initiating your LIF, again a reminder: once you start the income stream for life it keeps flowing.

When to start your LIF may factor into when you take CPP or OAS decisions.

Further Reading: When to take your Canada Pension Plan (CPP) benefit.

When to take your CPP benefit

Can you “unlock” your LIRA? You bet, but it depends!

Some provinces allow the “unlocking” of all or a portion of a LIRA, LIF or LRIF under certain circumstances.

In addition, depending on your province, you might be able to “unlock” 50% of your LIRA with no limits.

Thankfully, here in Ontario where I live we have that feature in the regulation – a feature I intend to take advantage of myself!!

In Ontario, individuals aged 55 or older will be entitled to a one-time conversion of up to 50% of holdings value into a tax-deferred savings vehicle with no maximum withdrawal limits. If the funds are transferred to the locked-in fund’s owner’s own RRSP or RRIF, this does not require contribution room, and the owner is not taxed until the funds are later withdrawn from the RRSP or RRIF.

Check out Taxtips.ca that have an entire page dedicated to this subject.

Be mindful you have only 60 days to make any transfer after unlocking with your financial institution. 

Further still, up to 100% can be *unlocked if facing financial hardship or a shortened life expectancy. This can increase the flexibility on the timing of withdrawals. *There are however some cases instances/cases that apply.

Why I have a LIRA

When I left Toronto (and my employer at the time) to move to Ottawa in 2001, I was forced to move my money into a LIRA (a few thousand bucks). 

I moved about $7k since I was forced to leave the employer pension plan when I voluntarily left that organization.

You can read more about my LIRA and how I have invested inside this account here.

For the last few years, I’ve invested my LIRA in low-cost ETF QQQ for the U.S. portion.

As recently as 2023, I put some money into CBIL ETF for the Canadian portion to secure 4%+ yield inside this retirement account I intend to tap in about five years. 

Your mileage may vary. 

You can read about some new cash alternative ETFs like CBIL here.

Are Cash-Alternative ETFs Right for You?

Third, how should you invest in a LIRA?

It’s impossible to provide any direct invest without understanding any investor complete picture but I can share this case study below I did a few years ago.

Check out this reader case study:

Mark, I subscribe to your site and I enjoy reading about your personal finance journey and DIY approaches to investing.  However, I work for a company that recently announced it is closing in May 2019. I would like to know what to invest in, given some of this pension money will need to be placed into a LIRA. I’m forty- eight years old so I still have a long ways to go before retirement, so I want this money to grow. I believe the LIRA amount will be close to $200,000 so it’s a lot of money. I definitely appreciate any insights – I know you can’t offer direct advice.

Keep up the great work!

Thanks for your question and yes, you are correct, I can’t offer direct advice but I can offer a take on what I would consider.

My Own Advisor take:

I’m going to make the following assumptions with your LIRA. You:

1. Have a modest-risk tolerance.
2. Are willing to “stick to the plan” – not trade in and out of ETF(s).
3. Have modest investment knowledge.

For your LIRA, consider some of the following articles on my ETFs page.

Generally speaking, owning an all-in-one fund could provide you with one-stop shopping (and longer-term growth) whereby you don’t need to worry about any asset allocation or asset location over time.

Consider these low-cost all-in-one funds here, including VGRO, ZGRO, XGRO or HGRO for your LIRA.

The Best All-in-One Exchange Traded Funds

Fee-for-service financial planner take: 

Enter in Owen Winkelmolen is a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca. He specializes in budgeting, cashflow, taxes & benefits, and retirement planning. 

When it comes to retirement planning, it’s important to look at retirement assets across the entire investment portfolio and not just account by account.

Mark wrote about asset allocation above, that’s important, but asset location is very important too – that describes the tax impact of holding specific retirement assets in specific accounts (GICs, bonds, Canadian equities, US equities, international equities).

When considering asset location, it’s important to understand how investments will eventually be withdrawn from each account as well. Some accounts allow for a lot of flexibility on withdrawals (like RRSPs and TFSAs), while other accounts are very restrictive (like RRIFs and LIFs).

Because of the restrictive nature of the LIRA/LIF we shared above, one strategy to consider is to keep LIRA accounts as small as possible.

What I mean is, as long as the overall asset allocation stays on target across the portfolio, consider lower return investments like bonds and GICs in the LIRA.

This way, higher return investments (i.e., more equities) can be held in the RRSPs and TFSAs.

Over time this allows the RRSPs and TFSAs to grow faster than the LIRA and helps to increase income flexibility in retirement (which could help avoid higher income tax rates and/or GIS (Guaranteed Income Supplement) & OAS (Old Age Security) claw backs).

You can read about OAS claw backs and much more about OAS in Mark’s post here.

Here is what I mean in a couple of charts just for illustrative purposes:

While Mark’s suggestion to keep things very simple is OK, placing specific assets in specific accounts requires a level of flexibility that all-in-one funds just don’t allow. Having this bond-like flexibility in a LIRA would require at least a simple portfolio of ETFs and/or low-cost mutual funds.

This does create some complexity because assets would need to be rebalanced as mentioned above across the entire portfolio at least annually. The benefit (of bonds/fixed incomes in the LIRA) though is that the LIRA is much smaller in the future.

By using a more specific asset location strategy the LIRA could be $163.7K smaller, and up to $378.7K smaller if 50% is unlocked and placed into an RRSP. As a result, the mandatory withdrawals will be smaller as well – providing potential tax flexibility in retirement – but the portfolio overall is the same size ($1.48 M).

On the flip side, sometimes “simplicity is the ultimate sophistication”.

If simplicity means that an investor (you in this case) will stick to the plan, then holding the same investment, or investment allocation, in each account might be the best option. All-in-one funds like the ones from Vanguard, iShares and other companies that Mark wrote about above, provide a simple and inexpensive way to create a highly diversified portfolio that automatically rebalances.

What is a LIRA and how should you invest in it summary

I think if you want to maximize your flexibility in retirement, minimize income tax, and minimize government claw backs, then it’s beneficial to look at your overall portfolio and retirement draw down plan when making investment decisions across different accounts.

When you to consider asset decumulation, I think the combination of “unlocking” your LIRA (if you can) and converting your LIRA to a LIF when you do unlock your LIRA is a great one-two punch.

This way, you can convert LIRA money to an income stream designed for life (LIF) and you are only taxed when you receive the income.

Years ago, I moved my money into low-cost QQQ.

I have since now added CBIL to my portfolio as well.

Let me know your thoughts on this updated post and happy to share more related LIRA, LIF or RRSP, RRIF content over time too!

Mark

Disclosure:  My Own Advisor, and the financial expert above, has provided this information for illustrative purposes.  This is not direct investing advice nor should it ever be taken as such.  Assumptions above are for case study purposes only.  If you have specific needs, please consider consulting a fee-only financial planner to discuss any major financial decisions.

Thanks again to Owen Winkelmolen, a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca for his contributions to this post.