Let’s start with what a LIRA is. LIRA or Locked-In Retirement Account holds your defined contributions (DC) or defined benefits (DB) pension plan that were paid for by your employer after you left your job. In other words, LIRA was designed for supporting your future retirement.
Often, LIRA is known as a strict account that is difficult to access the money withheld in it. However, little do you know; these three myths could help you to access or grow your money as you need it for your retirement.
Though you cannot either contribute or withdraw money from LIRA, you can use the locked-in money to invest and grow your money for a better retirement. With LIRA, you can control your investments—you decide how and where you want to invest your money. Build up your LIRA portfolio with stocks, options, mutual fund, bonds, ETFs, and precious metals to get the most out of your retirement.
Any growths from investment activities in your LIRA will be TAX-FREE until you start to withdraw the funds when you retire or when you close your LIRA (latest by December 31st of the year that you turn 71 years of age). LIRA funds that turn into your income will be taxed either your funds were converted to a LIF or were used to purchase a Life Annuity. However, drawing your income slowly over many years could help to minimize the amount of tax paid.
It is challenging when planning for retirement. It can be frustrating when you need extra cash for retirement and you know it is in your LIRA, but you are not sure under which circumstances your LIRA can be unlocked early. The regulations that allow you to unlock your LIRA early is varied from province to province. Federal law might be subjected to your LIRA if you worked for a federal regulated industry such as banking, telephone, television, or airline transportation.
If you are in one of the following situations, you would be able to withdraw your money from LIRA early:
Before making an application to access your money in LIRA early, it is important to verify in which province your LIRA is subjected to and if you are under which province/territory or federal laws and regulations.
Note: All numbers listed in the table above are for 2017 (These numbers are subjected to change every year)
The most often asked question for LIRA account holders is “What should I convert my LIRA into?”. Typically, there are four common options for retirees to convert their LIRAs:
Insurance companies offer life annuity that will pay you a guaranteed specific payment on a regular basis for life. The payment you receive depends on the amount of money used to purchased annuity, your current age, current interest rate, and other factors. However, you do not have control over the involved investments.
There is minimum and maximum withdrawals amount annually, but you have control over your investments.
Similar to LIF
The most flexible choice for LIRA. There is no requirement for minimum and maximum withdrawal. However, if you retire before 65, you will not get a pension tax credit for the income in a PRRIF.
Of the four options to convert LIRA, LIF is the most common decision that retirees often make. The provincial legislation imposes that a LIF has a maximum amount that you can withdraw every year. Ensuring you will have money in LIFs for your lifetime is the reason why LIFs have a maximum payment amount.
Furthermore, after converting your LIRA to a LIF, you can, later on, use your LIF to purchase a Life Annuity. The older you are, the more mortality credits you have (fewer years left to live), so the insurance company will offer a higher monthly annuity income.
Retirees with LIRAs should advise professional financial advisors for the best solution to convert LIRA and how to build the best retirement for their future.