Locked-In Retirement Account (LIRA)

Locked-In registered plans including LIRA, LRIF, PRIF, and LIF accounts are commonly available through the same institutions that provide RRSPs, such as banks, trust companies, credit unions, caisses populaires, and investment dealers. They are all considered “registered” plans, and so they are registered with Canada Revenue Agency, and funds in the plan accumulate income on a tax-deferred basis.

Locked-In Retirement Accounts can be opened at any age.  Individuals in most cases open LIRA accounts as a result of leaving an employer with a company administered pension plan.  Upon leaving an employer individuals would receive their commuted value of their pension.  This commuted pension would be transferred in most cases to provide individuals with the opportunity to defer tax. However, it is important to note that you might not be able to transfer the full commuted value of the pension into a LIRA tax-free. If the amount transferred is above a certain income tax limit, then the excess amount is classified as income, which would become taxable in the year the transfer is made.

Tax deferral occurs as a matter of course when the commuted value is taken, because the funds and any income those funds generate reside in the account you have chosen. As long as the money stays in the account, it isn’t taxed. However, tax must be paid when you make withdrawals, and the amount of money you receive must be declared in your annual income tax return.

When you make a withdrawal greater than the required minimum from one of the locked-in plans, a withholding tax will be applied that increases with the amount withdrawn. Then at the end of the year, the total amount that has been withdrawn must be included in your annual income. You will receive a credit for the tax you have already paid during the year, so that you are not taxed twice.

LIRA Specifics

  • When you take the commuted value of your pension and do not transfer it to another pension or registered plan (or if you are unable to do so owing to age restrictions), you must establish a LIRA to hold the amount that you transfer.
  • A LIRA is the locked-in equivalent of an RRSP account, and is often referred to as a locked-in RRSP.
  • Assets in a LIRA are protected from creditors – people to whom you owe money.
  • By the end of the year in which you turn 71, you must transfer the funds out of the LIRA to a LIF, LRIF, PRIF, or use the funds to purchase a life annuity.

Investors have the ability to invest in a variety of investments and achieve tax-free growth in LIRAs.  These investments include Guaranteed Investment Certificates (GICs), mutual funds, segregated funds, exchange-traded funds (ETFs), and stocks and bonds that are listed on an exchange.

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