What is a Locked-In Retirement Account (LIRA)? Here is my update
Some time ago (actually a long time ago…) I wrote about my LIRA (my Locked-In Retirement Account (LIRA)).
This post will recap this type of investment account and highlight what’s new with my investments in that account.
RRSP vs. LIRA
Registered Retirement Savings Plans (RRSPs) are far the most part, understood. An RRSP is a tax-deferred account and depending upon the type of RRSP account you own, you can hold various investment products or securities such as GICs, cash, bonds, stocks, ETFs and more for long-term tax-deferred growth.
There is no tax on the growth of the investments inside the RRSP but tax is paid when money is withdrawn from the account – usually in retirement.
A LIRA (Locked-In Retirement Account) is not unlike an RRSP – it also provides long-term tax-deferred growth for assets inside the account. Where it differs is how it originates.
Most adult Canadians can open an RRSP any time. A LIRA is basically designed to hold pension money outside of a pension plan.
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.
When I left Toronto (and my employer at the time) to move to Ottawa some 17+ years ago now, I was given an option to move the defined contribution pension money I accumulated with that employer to a LIRA. I did so because I didn’t want to leave that money in that pension plan (who knows what might or might not happen to that privately-owned company?) and furthermore, I knew I could take investing matters into my own hands using a self-directed LIRA account at my discount brokerage.
Unfortunately I also knew I couldn’t contribute to the LIRA (which is a major difference between a LIRA and an RRSP). Because LIRAs hold pension money, you cannot make direct contributions on your own. Depending on the jurisdiction the pension was registered in, LIRAs can be managed federally or under provincially regulated pension laws. Mine was regulated within Ontario. RRSPs are regulated by our income tax act which makes the rules universal across Canada.
How I used to manage my LIRA
When I first established my LIRA, many years ago in 2001, I owned one mutual fund. It was a dividend growth mutual fund at my big bank. After learning more about ETFs, bonds, indexing and stocks throughout my 30s, I decided this fund and the high fees associated with it had to go. I knew I could invest at a lower cost on my own.
In early 2010, I converted my mutual fund LIRA to a self-directed LIRA (around the same time I was getting the rest of my financial house in better order). After opening my self-directed LIRA, I sold my mutual fund and invested in two key assets: iShares XBB ETF (a short-duration bond ETF) and some Coca-Cola stock.
Why XBB? At the time, the financial world was coming out of the financial crisis and I too, was worried about falling markets again. I knew bonds would provide some stability if equities were to crash again.
Why Coca-Cola? Also at that time, I was heavy into my readings about dividend paying stocks and this one was near the top of my buy list. I held Coca-Cola stock for a few years until late-2015.
How I manage my LIRA – now
While owning Coca-Cola stock was fine; the returns were decent between 2010 and 2015 (the stock doubled in price); the dividends flowed in, I came to the realization that more equity diversification would be better for my LIRA. So, in late-2015 I sold all my XBB units and all my Coca-Cola stock and purchased a few hundred shares of iShares HDV ETF. I hold HDV units to this day.
I purchased HDV for the aforementioned extra diversification/the U.S. exposure to dozens of U.S. blue-chip companies (not just Coca-Cola) to offset the growing percentage of my Canadian content that exists inside my TFSA and non-registered account. I also purchased HDV because I happen to have a small workplace pension in my future, a “big bond” if you will, so I don’t feel the need to invest in any bond ETFs anymore. Finally, I purchased HDV so I could run a DRIP for this fund, compounding money over time.
I won’t be able to tell if selling Coca-Cola stock was a good or bad move until decades from now but I do know in recent years, HDV has performed modestly and it should continue to do so. For 2018 however, this fund is off to a very poor start but then again, thanks to my dividend reinvestment plan (DRIP), I’m buying HDV at a lower price now than before. Based on the unit price, every quarter, I’m able to reinvest the distributions paid to purchase two units of this fund at my discount brokerage that honours DRIPs for U.S. stocks and U.S. ETFs. If I owned another popular U.S. ETF like Vanguard’s VTI, while a great fund, I wouldn’t have enough money to run a DRIP – I would be just short.
How I might manage my LIRA – future
To recap, in 17-plus years of investing using this particular account, I’ve gone from owning a big bank fund costing me over 2% in money management fees, to owning units in iShares XBB ETF and some Coca-Cola stock, to owning a low-cost U.S. dividend fund (HDV) that charges me 0.08% in fees inside my LIRA.
As for the future, while I might eventually switch from HDV to VTI, a far more diversified, lower-cost U.S. ETF that might provide better total return, I can definitely see myself keeping some U.S. content inside this account.
As we approach semi-retirement and as I near age 55, I will consider converting my LIRA into another tax-deferred vehicle such as a Life Income Fund (LIF) or a Locked-In Retirement Income Fund (LRIF). The entire subject of LIFs and LRIFs and “unlocking” any value within them is for another day. 🙂
What do you make of my investment choice? What would you do differently? Do you have a LIRA and if so, how do you or did you manage it? Share away in a comment below.