If you live in Canada, then you’ve probably heard the terms RRSP and TFSA before. Canadian finance is full of crazy acronyms though… for example, have you ever heard of a LIRA? What the heck is that, and how does it relate to an RRSP and TFSA? Today, we’ll demystify another personal finance acronym. Let’s talk LIRA, shall we?

First off, the acronym itself. LIRA stands for Locked-In Retirement Account. That’s right, a LIRA is an account that holds money meant for your retirement, just like an RRSP. So how is a LIRA different from an RRSP?

LIRA vs. RRSP

A LIRA and an RRSP are similar in many ways. First, they both hold money that is meant for your retirement. Second, both account allow your investments to grow on a tax-deferred basis, meaning you don’t pay tax until you withdraw the funds when you retire. Third, there are penalties for taking money out of either account early, with rare exceptions for financial hardship.

Unlike an RRSP though, you can’t contribute to a LIRA. A LIRA is also much more difficult to withdraw money from – it’s called a Locked-In Retirement Account for a reason. While you can withdraw money from an RRSP (and pay a tax penalty to do it), the only way to get money out of a LIRA is to prove you’re having a rough time financially.

The reason for this is that a LIRA is meant to hold fund from a pension you may have had through work. In fact, leaving a job where you had a pension is the only way to get a LIRA – you can’t just walk into your local bank branch and open one up.

So if you have a LIRA, and the money’s locked in… what do you do with it, exactly?

Converting a LIRA to a LIF

Ah yes, our archnemesis… more acronyms. Just like you convert an RRSP into a RRIF (Registered Retirement Income Fund) to start withdrawing money when you retire, you do something similar for a LIRA. When you’re ready to retire, you can convert your LIRA into a LIF, or a Life Income Fund.

You take money out of a LIF the same way you do with a RRIF, except that there are maximums on how much you can withdraw each year. When you take money out of a LIF in retirement, it’s added to your income for the year, the same way as funds from a RRIF are. That means you’ll pay tax on your withdrawals.

So is there any way to “unlock” money that’s locked into a LIF? Depending on the province or territory you live in, there sure is…

Unlocking Money from Your LIF

Onward.

Before I explain how this works, I want to caution you on this one: transferring money out of a retirement account should never be done lightly, and should always be done after consulting someone who’s an expert on this stuff, which I’m not.

Depending on where you live, you might be able to transfer up to 50% of the value of a LIF into an RRSP or RRIF. This can only be done within 60 days of converting the LIRA into a LIF though, do you’ll need to move fast.

You may also have the option to withdraw the funds as cash, though you’ll be taxed on the full amount of the withdrawal in that case. I’m no expert, but that sounds like a bad idea in most cases to me.

If you’re interested in further reading on the subject, this article does a good job of breaking this down in more detail.

Wrapping it Up

Like that crazy cat lady who always speaks in gibberish, LIRAs aren’t scary once you get to know them a bit. You only get them by leaving a job with a pension, and the money is meant to stay locked in until you retire, just like a pension would. While they’re a little different than an RRSP, a LIRA is ultimately just another tool in your retirement toolbelt!