Locked-In Retirement Account (LIRA) and Locked-In Retirement Savings Plan (LRSP)
Locked-In Retirement Accounts (LIRAs) and Locked-In Retirement Savings Plans (LRSPs) are designed for individuals with pension savings they want to preserve until retirement. These accounts are ideal for pension transfers, providing a way to manage those savings within defined regulations.
Features of LIRA and LRSP Accounts:
- Pension-Focused Savings: Both LIRA and LRSP accounts are specifically for transferring savings from employer pension plans when leaving a job.
- No Direct Contributions Allowed: Unlike regular RRSPs, you can’t add new contributions beyond the initial pension transfer.
- Locked-In Status: Funds in these accounts are “locked-in” until retirement age, meaning they can’t be accessed before a specified minimum age.
Benefits:
- Tax-Deferred Growth: Just like RRSPs, investments within LIRA and LRSP accounts grow tax-free, which can help build a larger retirement nest egg.
- Dedicated Retirement Security: By locking in pension savings, these accounts help ensure that funds are preserved specifically for retirement.
Who is it Suitable For?
- Individuals leaving a company with an employer pension plan who want to keep their pension savings secure.
- Those seeking a reliable way to hold pension funds until retirement age, ensuring they aren’t accessed prematurely.
Tax Implications:
- Tax is deferred until withdrawals are made. This means you won’t pay taxes on growth or interest within the account, only when you start withdrawing funds in retirement.
Restrictions:
- Locked-In Access: Funds generally can’t be withdrawn until retirement, with minimum age requirements (usually around age 55, but varies by province).
- Mandatory Conversion: At retirement age, LIRA/LRSP accounts must be converted to a retirement income fund (like a LIF) or an annuity to start receiving payments.
Advantages and Disadvantages:
- Advantages: Tax-deferred growth supports long-term asset growth, and locked-in status ensures funds are available for retirement. These accounts also offer a secure way to preserve pension assets outside of an employer’s control.
- Disadvantages: Limited flexibility in accessing funds; early withdrawals are generally prohibited except under specific hardship conditions. In addition, mandatory conversion to a retirement income fund restricts flexibility at retirement age, meaning some limitations continue throughout retirement.
Summary
LIRA and LRSP accounts are valuable tools for preserving pension savings for retirement, combining tax-deferred growth with restrictions that help protect retirement assets. While they don’t allow new contributions or early access, they offer a reliable way to manage and grow pension funds outside of an employer’s plan, ultimately supporting a secure retirement income.