Retired Money: Everything you wanted to know about LIRAs but were afraid to ask

We’re now well into RRSP season, as the last two days of Hub posts demonstrates. See RRSPs: getting past the contribution inertia (a guest blog by Sage Investors’ Aman Raina), and my latest FP article, reprised on the Hub as Why RRSPs are less critical for Millennials than for the Boomers.

Over at MoneySense, my latest Retired Money column has been published, and it looks at the closely related topic of LIRAs (Locked-in Retirement Accounts, which have been termed “the RRSP’s less flexible cousin.” You can find the full column by clicking on this highlighted headline: Unlocking the Mystery of LIRAs.

In a nutshell, LIRAs are also known in some provinces as Locked-in RRSPs, which is exactly what they are. Unlike regular RRSPs, from which you can withdraw funds (and pay tax) if you need it at any time, LIRAs generally prohibit you from making any withdrawals before 55. Granted, when you’re younger that prohibition — illustrated above as a locked piggy bank — may seem frustrating but the idea is to protect our future retired selves from our current “tempted to spend it all” current selves.

As TriDelta Financial wealth advisor Matthew Ardrey told me, you’re going to see a lot more about LIRAs in the coming years. Whether you’re leaving a classic Defined Benefit pension plan or a more market-tied Defined Contribution pension plan, the job market these days is in such flux that a lot of people are going to have to start learning about what happens when you leave an employer pension plan earlier than you might once have envisaged.

LIRAs will multiply as Boomers reach Findependence

In the case of leaving an employer that provided you with a DB pension, you’ll be getting a lump sum based on the so-called “Commuted Value” of the pension at the time you leave (whether voluntarily or due to corporate layoffs or restructuring). I suggest that those who value the certainty of future DB pension payments plan eventually to annuitize such plans, likely the end of the year you turn 71.

As for DC plans that turn into LIRAs, these are no great mystery. My wife has a modest-sized LIRA that was established after she left a pension plan in her industry some ten years ago. To us, it behaves and looks exactly the same as an RRSP, and holds similar securities. Yes, it was “locked in” but we’re still letting the plan grow via the underlying investments (unlike RRSPs, you can’t add to it.) At some point it will be time to start accessing the funds but that’s still a few years away yet.

Just as an RRSP must eventually be annuitized or converted to a RRIF by the end of the year you turn 71 a LIRA must be converted either to a life annuity or to a Life Income Fund (LIF) or LRIF. Like a RRIF, the LIF or LRIF will be subject to minimum annual withdrawal amounts, fully taxable in the pensioner’s hands, and the schedule will gradually rise as a percentage until your 90s.

For some of the finer points, including consolidating multiple LIRAs, see the full MoneySense column.

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