Moving money from your LIRA to your RRSP: Is it a good idea?

Why should I keep my LIRA?

You may come across tempting offers or even schemes claiming to help you avoid paying income tax or to give you immediate access to the funds in your locked-in account. Remember, if it seems too good to be true, it probably is, and you should be wary.  

Your LIRA is designed to support you throughout your retirement 

Without getting into the details of how a LIRA works, it’s important to know that to access it during retirement, you first have to transfer it to a life income fund (LIF). 

There’s a minimum amount you’ll need to withdraw from your LIF each year, as well as a maximum annual withdrawal amount you can’t exceed. You might think, then, that it’s better to unlock your LIRA to avoid the restrictions that come with it.

However, these limitations can be advantageous. Why? Because your LIRA is meant to support you for the duration of your retirement. The annual withdrawal cap exists to prevent people from taking all their money out at once and depleting it. The goal is to help maintain a certain standard of living for as long as possible. Essentially, a LIRA is a bit like a registered retirement savings plan (RRSP), only with more restrictions. 

A good strategy for some is to keep withdrawals from your LIRA-LIF below the annual maximum, taking no more than what’s absolutely needed. This lets you minimize your tax liability and stretch out your withdrawals over time. The more you withdraw each year, the faster your reserves will dwindle.

Depending on average life expectancy and real interest rates, a LIRA may not provide you with adequate income for the rest of your life, even if you only withdraw the minimum amount required each year. In short, unlocking your LIRA means ramping up withdrawals and running the risk of finding yourself with a reduced income earlier in your retirement. 

Good to know: To be designated a LIRA, the money must come from a pension plan, and the employer must be under provincial jurisdiction. If the pension plan is under federal jurisdiction (banks, telecommunications, aviation and others), it’s called a locked-in RRSP rather than a LIRA.  The conditions for unlocking a LIRA or a locked-in RRSP vary by jurisdiction. 

You may already have access to your LIRA for certain specific reasons

There are a few reasons why you may be able to withdraw from your LIRA without the usual restrictions. As discussed above, conditions may vary depending on your province or territory and necessity. Here are a few possible scenarios:

• You were 65 years of age or older at the end of the year preceding your application, and your LIRA amount is sufficiently low (example from Retraite Québec: 40% or less of maximum pensionable earnings)
• You haven’t resided in Canada for more than two years
• Your life expectancy has decreased due to a physical or mental disability (with supporting medical evidence)
• You die

A LIRA offers creditor protection

Those who currently have a registered retirement savings plan (RRSP) may have already been approached about purchasing insurance products to protect them from creditors. While these products may be appealing in some cases, they can be expensive. By keeping your assets in your LIRA, you have similar protection that won’t cost you a penny because LIRAs are already automatically protected from creditors. 

Unlocking your LIRA costs money and requires patience

Unlocking your LIRA can be a bit of an administrative obstacle course. It involves transferring, opening and closing accounts, and in most cases, hiring professionals to assist you. It takes time and a certain degree of involvement. There may also be fees to pay along the way.   

Not only can all these moving parts lead to errors, but there may also be unexpected tax implications. For example, you may see a change in alimony payment amounts since they’re based on income, which includes withdrawals from your LIRA (now a LIF). 

In what situations might it be advantageous to unlock my LIRA?

I want to leave my LIRA to someone other than my spouse

Did you know that if you have a spouse who is recognized in your province, that person will automatically inherit your LIRA upon your death? If you absolutely want to leave the money in your LIRA to someone else, such as your children, unlocking your LIRA might be a solution. You would then have the option of investing your money so that it can be passed on according to the wishes of your will.  

This situation adds a layer of complexity to the usual administrative steps, which can already be quite tricky, and for this you’ll need to hire a lawyer. Your attorney will help you navigate the various constraints, such as your spousal benefits renunciation. 

Good to know: If your LIRA doesn’t come from your own pension plan but rather your ex-spouse’s, for example, you have the freedom to bequeath it to whomever you choose.   

LIF withdrawals from my LIRA prevent me from accessing my full GIS

The Guaranteed Income Supplement (GIS) is provided by the Government of Canada to people whose income is below a certain amount. If the income from your LIRA combined with your other retirement income keeps you from having full access to your GIS—even if you withdraw no more than the minimum—you may want to unlock your LIRA. 

You would then have to get your funds out as quickly as possible to reduce your income in subsequent years and eventually have access to the full GIS. 

Pro tip: Avoid spending the money you’ve withdrawn from your LIRA-LIF and set it aside, perhaps in a TFSA or a similar account, to support yourself in retirement. 

H3: I don’t have an RRSP, TFSA or non-registered account available for unexpected expenses

Unexpected expenses may arise, and the maximum LIRA withdrawal may not be sufficient to cover them. If you don’t have other more accessible assets (RRSP, TFSA, non-registered account, etc.), you may need to unlock a portion of your LIRA. We’re talking about emergencies here; the main role of your LIRA should still be to provide you with steady retirement income throughout your life. 

What are the steps to gradually transfer the funds in my LIRA to my RRSP? 

Suppose that one of the situations outlined above applies to you and you want to withdraw the money from your LIRA. You’ll need to follow these steps with the help of your advisor.

1. Open a life income fund (LIF). 
2. Transfer the money in your LIRA to a LIF.
3. Withdraw the maximum amount authorized by law from the LIF. Note that the maximum amount depends on several criteria, such as your age.
4. Invest this amount in a registered retirement savings plan (RRSP).
5. Transfer the LIF balance to a new LIRA before the end of the year.
6. Repeat these steps each year to access an additional portion of your retirement savings.

What are the key things to remember? 

Why transfer the money in your LIRA to a LIF? Simply put, it’s impossible to withdraw money directly from a LIRA. The LIF is a necessary first step. The second step, transferring the funds from your LIF into an RRSP, will allow you to avoid paying tax on the unlocked amount until it’s withdrawn.

Next, transferring the LIF balance to a new LIRA will allow you to maximize your withdrawals. In fact, you can transfer the difference between the minimum and maximum LIF withdrawals to your RRSP. Note, however, that there is no minimum withdrawal in the first year, so you can simply transfer the maximum. Mandatory minimum withdrawals beginning in the second year are taxable. You can avoid paying tax by withdrawing the minimum amount in subsequent years.

By now, you’re surely wondering how much you’ll be able to withdraw each year. The maximum amount allowed by law depends on your age, your province and the amount accumulated in your LIRA and transferred to the LIF.

The locked-in retirement account (LIRA) is aptly named. While it’s a rather restrictive account, it also has its advantages and is designed to help you live comfortably in retirement. If you decide to unlock it, make sure you do so for the right reasons. To help you make this important decision, consult our team of retirement specialists. We’re here to answer your questions.