Learning about Locked-In Retirement Accounts

Every industry uses a set of acronyms and the financial industry is no different.  When is comes to locked in accounts, there are LIRAs and LIFs.

What are locked-in accounts?

Locked in accounts are simply money that originates from a pension plan.  As long as you are employed by a company or organization with a pension, you money stays in that pension.  There are two kinds of pension plans – defined benefit plans and defined contribution plans.

But when you leave that company, you may have the choice to move the money into a personal plan.  Many people assume you can move pension money into a RRSP but that can only happen if it is a relatively small amount of money.

What is a LIRA?

A LIRA is a Locked-In Retirement Account and is designed for accumulation of pension money outside a pension plan.  If you do not need income from your pension funds, then a LIRA allows you to manage your pension funds personally.  A LIRA is just another type of registered account much like an RRSP.  Think of them both as ‘buckets’ of money.  The two main differences between a LIRA and an RRSP are:

1. LIRAs hold pension money.  RRSPs hold money that you have contributed on your own.  Because Locked-In Retirement Accounts hold pension money, you cannot just contribute money into a LIRA.  The money has to be transferred in from a pension.
2. With RRSPs, you can take money out whenever you want and there are no restrictions on how much money you can take out.  Although it may not be ideal, you can cash out all of your RRSPs at once.  With LIRAs, you are restricted on withdrawals.  Firstly, you cannot take out lump sum withdrawals out of a Locked-in Retirement Account hence why that are called ‘Locked-in’.  If you want income, you must move the money into a LIF or Life Annuity, which I will discuss later.

Other than these differences, RRSPs and LIRAs are very similar.

-    As long as the money stays in the account (or bucket), there is no tax.  As soon as money leaves the bucket, tax has to be paid
-    You can invest in many different types of investments like GICs, bonds, mutual funds, stocks, etc.

What is a LIF?

When you eventually need to move from the accumulation phase in life to the income phase, a Life Income Fund (LIF) is one of the options for income.  A LIF is used to convert LIRA money to income just like a RRIF is used to convert RRSPs to income.  Just like the LIRA has similarities to the RRSP, the LIF has a lot of similarities to the RRIF.

• A Life Income Fund is designed to create regular income.  If we used the bucket analogy, the LIF and the RRIF are just buckets with holes in them.
• In both cases, there is a minimum income that must come out of then plan.
• Income is only taxed when you receive income.
• In both the RRIF and the LIF, you can invest in many different types of investments like GICs, bonds, mutual funds, stocks, etc.

The big difference between the LIF and a RRIF is that the LIF not only has a minimum income but also a maximum income that prevents you from spending the money too quickly.

The Pension Puzzle

Pension law can be very complex because every province has its own set of rules.  To learn more about LIFs and LIRAs, I recommend The Pension Puzzle by Bruce Cohen and Brian Fitzgerald.  For more information on this book, visit their website

Related Posts:

• What Is A Locked-In Retirement Account (LIRA)?
• Converting An RRSP To A Registered Retirement Income Fund (RRIF)
• You Can Afford Retirement But Can You Afford Retirement Care?