What is a LIRA and Why Might You Need One?

If you’ve ever changed jobs and left behind a pension, or if you’re exploring ways to manage retirement savings, you may have come across the term “LIRA.” This is a Locked-In Retirement Account, and it plays a key role in helping Ontarians manage funds from a workplace pension.

What is a LIRA?

A Locked-In Retirement Account (LIRA) is a registered account designed to hold funds transferred from a workplace pension plan when you leave a job. Unlike a regular registered account, the funds in a LIRA are “locked in” to ensure they are used exclusively for retirement income. This locked-in feature is a defining characteristic of a LIRA, not a choice made by the account holder.

A LIRA typically holds money that comes from a defined benefit or defined contribution pension plan. These are types of workplace retirement saving plans, with the difference between them being how they accumulate and provide your retirement income. A defined benefit plan guarantees a specific retirement income based on a formula, such as years of service and salary to calculate your pension, with no real dependence on the return of the investment. A defined contribution plan is more like a savings account or RRSP that flows over time, but where both you and your employer contribute a set percentage of your income into the plan. How much it accumulates, or the income it can provide in retirement is subject to its investment growth.

When you leave your job or retire, the funds in either a defined benefit plan or defined contribution plan can be transferred into a LIRA. Once transferred, these funds can grow tax-deferred, but you can’t add new contributions or access the money until retirement age—unless under specific, legislated circumstances such as financial hardship or severe medical needs.

Why Would You Need a LIRA?

A LIRA may be beneficial for people who:

• Have left a job with a pension plan: If you leave an employer that offered a pension, you often have the option to transfer your pension funds into a LIRA rather than keeping them with the employer’s plan. This provides greater control over how your retirement savings are invested.
  
  
• Want to safeguard their retirement savings: The “locked-in” nature of a LIRA ensures that the money is preserved for its intended purpose: providing income in your retirement years.
  
  
• Are looking for investment flexibility: Within a LIRA, you can select from a variety of investments, such as GICs, exchange-transfer funds (EFTs), stocks, and bonds, to align with your retirement goals and risk tolerance.

How Does a LIRA Work in Ontario?

Each province governs its pension legislation, and in Ontario, there are specific rules to be aware of:

• No early withdrawals: Funds in a LIRA account cannot be withdrawn directly. However, they can be converted to a Life Income Fund (LIF) or used to purchase an annuity – another financial product offered through an insurance company – as early as age 55. Special exceptions, such as financial hardship or shortened life expectancy, may allow limited access to the funds earlier.
  
  
• Mandatory conversion: By December 31 of the year you turn 71, a LIRA must be converted into a Life Income Fund (LIF) or used to purchase an annuityThis ensures the funds provide retirement income as intended.
  
  
• Growth potential: Your investments grow tax-deferred while in the LIRA, helping your retirement nest egg keep pace with inflation and long-term financial needs.

Your retirement savings are more than just numbers—they represent years of dedication and the future you’re building for yourself. A LIRA helps ensure that every dollar you’ve earned continues to serve your goals. That said, LIRAs come with rules and restrictions that require careful planning. Understanding how your LIRA fits into your broader retirement strategy is key to making the most of this savings tool.

Your financial journey doesn’t end when you leave a job—it’s only just beginning, and a LIRA can help you take the next step toward the retirement you’ve envisioned. Book an appointment to speak with a member of our Wealth and Investment team today! We’re here to help you Make Peace with Your Money.