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What is a Locked-In Retirement Account (LIRA) in Canada?

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A Locked-In Retirement Account (LIRA) is a special type of retirement account in Canada designed to hold and invest pension assets from a previous employer. It serves as a safeguard to ensure that these funds are set aside for retirement, providing a tax-advantageous vessel for individuals to grow their retirement savings.

Understanding Locked-In Retirement Accounts (LIRA)

A LIRA is essentially a repository for pension funds accrued from previous employment. When an individual leaves a job where they have an employee pension plan, they can opt to transfer their pension savings into a LIRA.

The distinctive feature of a LIRA is its “locked-in” nature, which means the funds within are inaccessible until the individual retires. This type of account is specifically structured to hold pension funds and help grow the individual's eventual retirement income through various investment options.

How It Compares to An RRSP

A LIRA shares similarities with a Registered Retirement Savings Plan (RRSP) but with a crucial difference regarding fund accessibility. Unlike RRSPs, LIRAs have restrictions on how and when funds can be withdrawn, essentially locking the funds until retirement.

RRSPs are more flexible retirement savings accounts that individuals can contribute to and withdraw from, albeit with certain tax implications.

Why Utilize a LIRA?

Utilizing a LIRA can be beneficial for individuals who have accumulated pension funds with a previous employer and wish to preserve these funds for retirement. The locked-in feature helps prevent impulsive or premature withdrawals, ensuring that the money grows over time and is available upon retirement.

Investment within a LIRA

Individuals can choose how to invest the money within their LIRA to help grow their eventual retirement income. Various investment options are available, and, like an RRSP, these can extend to include, but are not limited to, the following.

  • Cash
  • Equities / Stocks
  • Fixed Income Securities
  • Mutual Funds
  • Exchange-Traded Funds (ETFs)
  • Real Estate Investment Trusts (REITs)

As always, individuals should work/consult with financial advisers to guide their investment decisions.

Tax Implications, Contribution Limits, and Withdrawal Restrictions

Like any investment account, there are various limitations surrounding taxes, contributions, and withdrawals.  The following are a few examples of these that apply to a LIRA.

Tax Implications: Funds within a LIRA grow tax-deferred, meaning you won’t have to pay taxes on investment growth until withdrawal. Additionally, contributions are tax-deductible, and employer contributions are exempt from payroll taxes.

Contribution Limits: Unlike RRSPs, additional contributions to a LIRA are generally not allowed unless transferred from another registered plan. There's an annual limit to the amount that can be contributed, which is determined by the originating pension plan.

Withdrawal Restrictions: While funds in a LIRA are typically inaccessible until retirement, at which point they must be converted into a retirement income product like a life annuity or a life income fund (LIF), there are a select few instances in which early withdrawal from a LIRA may be approved.  These may include forfeiting Canadian residency status, financial hardships, reduced life expectancy, and more.

Similar Products in the United States

In the US, a similar product is the Individual Retirement Account (IRA), specifically the traditional IRA, which also offers tax-deferred growth on investments. However, IRAs are not strictly tied to pension funds from a previous employer and have different rules regarding withdrawals and contributions.

Conclusion

A Locked-In Retirement Account (LIRA) provides a secure, tax-deferred environment for Canadians to preserve and grow their pension funds upon leaving a job. While less flexible than RRSPs, LIRAs serve a crucial purpose in ensuring that pension benefits are safeguarded until retirement.

For Canadian investors interested in kick-starting their retirement savings journey, one of the best options around to do so is Questrade – Canada's largest online brokerage platform.

For a deeper dive into investment options, including LIRAs and RRSPs, visit securities.io to explore a wealth of resources available to Canadian investors.

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