Many Canadians strive to save money for retirement so that when they retire they’ll have enough money to continue to live the lifestyle they had when they were working. Moreover, it’s crucial to have some savings for retirement, as the government pension plan is not always sufficient to maintain a comfortable retirement, especially if you rent or still have a mortgage.
RRSPs and TFSAs are common investment vehicles that can help you save for retirement and major events such as buying a house or pursuing higher education. Another investment vehicle that Canadians use to foster their retirement savings is a locked-in retirement account (LIRA). Like an RRSP, LIRA’s can be complicated as it does not allow you to withdraw any money until you retire, except in special circumstances.
A locked-in retirement account, or LIRA, is a registered investment account that you use to store money that has been transferred from a corporate pension plan. When you leave a company (or have been fired from a company), you can choose to turn your corporate pension into a LIRA, as the federal and provincial governments do not allow you to turn your pension into cash. With this account, you can invest in different investment products.
The major stipulation with a LIRA is that you cannot withdraw any funds from it until you retire (under most circumstances) – hence why it is called a “locked-in” account. You also cannot go to a financial institution and open a LIRA yourself. You must have a corporate pension plan that you can no longer contribute to due to a job resignation or a job dismissal.
Like an RRSP, a LIRA allows you to hold different investment products, including stocks, cash, bonds, GICs, ETFs, mutual funds, and index funds. Moreover, similar to an RRSP, any interest earned on these investments is tax-free until you withdraw them.
When you retire, you can make withdrawals from your LIRA without having to use one of the special unlocking rules mentioned below. There are some exceptions, but generally, you cannot withdraw the money in your LIRA until you retire. You withdraw the money by converting your LIRA to a life income fund (LIF) or purchasing a life annuity, which you must do before December 31st of the year you turn 71. When you withdraw money from your LIRA, it will be taxed. If you choose to convert your LIRA into a life annuity, you make a lump sum payment before receiving a consistent income for life. If you choose to convert your LIRA into a LIF, you can regularly withdraw a certain amount of your money.
There are pros and cons to both a LIRA and an RRSP. Each has different rules and different ways that you can use them.
With a LIRA, you can choose your own investments, and the account provides tax-sheltered growth. Since the money in a LIRA is locked in, you cannot withdraw it until you retire, which means you are guaranteed to have an income when you retire.
This account type also has its downsides. You can’t directly make contributions to a LIRA; you can only transfer funds from a corporate pension. You also cannot withdraw any of your money before you retire (except for special circumstances), and the LIRA is not eligible for either the Home Buyers Plan or the Lifelong Learning Plan. Depending on the province or territory where you live, there are different rules for LIRAs, so if you move when you retire you might find yourself subject to more unfavourable rules.
Like a LIRA, an RRSP allows you to choose your own investments in an account that provides tax-sheltered growth. Unlike a LIRA, however, you can directly contribute to an RRSP. You can withdraw as much as you want at any time, keeping in mind that withdrawals are subject to income tax. You can make tax-free withdrawals under the Lifelong Learning Plan or the Home Buyers Plan. Rules for RRSPs are also the same across Canada, so even if you move to another province or territory you won’t have to worry about any rule changes.
The major downside to an RRSP is obvious. Since you can withdraw your money at any time, you aren’t guaranteed an income at retirement.
Depending on whether your LIRA is under federal or provincial jurisdiction, there are different rules for unlocking your account.
If you have high medical or disability-related costs or have a low income, you can withdraw some of the funds from your LIRA. You can withdraw them either as cash or transfer them to a tax-deferred savings account like an RRIF or RRSP (subject to income tax rules).
If you are claiming financial hardship because of medical or disability-related costs, you can unlock up to 50% of the year’s maximum pensionable earnings under the Canada Pension Plan. If you are claiming financial hardship because of low income, you can unlock up to 50% of the year’s maximum pensionable earnings under the Canada Pension Plan if you do not expect an income. The year’s maximum pensionable earnings in 2022 is $64,900. If you are expecting an income, the amount that you can unlock goes down to zero if your expected income is 75% or more of the year’s maximum pensionable earnings under the Canada Pension Plan.
To unlock your LIRA due to financial hardship you must fill out:
If you stopped being a resident of Canada for at least 2 calendar years and your employment with the sponsor of the pension plan has ended, you can withdraw your funds in cash or transfer them to a tax-deferred savings account such as an RRIF or RRSP. You can withdraw or transfer the entire balance of your LIRA.
If your life expectancy is shortened because of a physical or mental condition, you can transfer your funds to a tax-deferred savings account such as an RRIF or RRSP, keeping in mind that your transfer is subject to income tax rules. You can also withdraw your funds in cash. The entire balance of your LIRA can be withdrawn or transferred.
If you have stopped being a member of a pension plan and the value of your pension is less than 20% of the year’s maximum pensionable earnings under the Canada Pension Plan, you can withdraw the entire amount of your pension as cash or transfer it to a tax-deferred savings account like an RRIF or RRSP. You are, of course, still subject to income tax rules if you choose this option.
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Those who are 55 years old or older can choose to unlock 50% of their LIRA. They can transfer up to 50% of their LIRA holdings into a tax-deferred savings vehicle like an RRSP or an RRIF. This transfer will not affect your contribution room and will not be taxed until you withdraw from your RRSP or RRIF.
To unlock your LIRA using this method, you must fill out Form 2: Attestation Regarding Spouse/Common-Law Partner.
If you are 55 years old or above and if the value of your LIRA, locked-in RRSPs, LIFs, and RLIFs is less than or equal to 50% of the year’s maximum pensionable earnings under the Canada Pension Plan, you can either transfer your funds to a tax-deferred savings account such as an RRIF or RRSP or withdraw them in cash. You can transfer or withdraw the entire value of your LIRA.
To unlock your LIRA using this method, you’ll need to fill out Form 2: Attestation Regarding Spouse/Common-Law Partner and Form 3: Attestation of Total Amount Held in Federally Regulated Locked-In Plans.
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Every province and territory has its own set of laws, so pension rules can become pretty complicated and confusing. Here is a table with information on unlocking rules in each province and territory:
| Financial Hardship | Non-Residency | Shortened Life Expectancy | One-Time 50% Unlocking | Small Account Balance Unlocking | |
| Unlocking Rules in Alberta | Yes | Yes | Yes | Yes | Yes |
| Unlocking Rules in British Columbia | Yes | Yes | Yes | No | Yes |
| Unlocking Rules in Manitoba | No | Yes | Yes | Yes | Yes |
| Unlocking Rules in New Brunswick | No | Yes | Yes | Yes | Yes |
| Unlocking Rules in Newfoundland and Labrador | No | No | Yes | No | Yes |
| Unlocking Rules in Nova Scotia | Yes | Yes | Yes | No | Yes |
| Unlocking Rules in Ontario | Yes | Yes | Yes | Yes | Yes |
| Unlocking Rules in Quebec | No | Yes | Yes | No | Yes |
| Unlocking Rules in Saskatchewan | No | Yes | Yes | No | Yes |
A great way to save for retirement is to put your money into a LIRA. You can create a LIRA by transferring the amount of a pension plan when you are no longer a member of the plan. For example, if you end your employment somewhere you had a pension plan. Generally, you cannot make any withdrawals until you retire, although there are some exceptions. Each province and territory has its own pension and LIRA unlocking rules, and some are under federal jurisdiction. Be sure to know about the rules in your jurisdiction so you can make the most of your LIRA
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Matthew joined the Loans Canada writing team in 2021 while was finishing up a Bachelor's degree at the University of Saskatchewan. It was there that he discovered his love of writing. His work has appeared in several publications, including the Canadian Student Review and NewEngineer.com. In his spare time, Matthew enjoys reading, geocaching, and spending time with his family and pets.
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