LIRA vs RRSP: what’s the difference?

Let’s start with the similarities. A Locked-In Retirement Account (LIRA) and a Registered Retirement Savings Plan (RRSP) are both investment vehicles that help you save for your retirement.

However, there are some important differences. 

What is a Registered Retirement Savings Plan (RRSP)?

An RRSP is a retirement account to help you save for retirement. When you make a contribution, you receive a tax deduction. Inside the RRSP, your investments grow tax-free. You only pay tax when you retire and start making withdrawals.

There are a couple of special circumstances in which you can withdraw funds from an RRSP without a tax hit. These are for first-time home buyers and people going back to school full-time.

What is a Locked-in Retirement Account (LIRA)?

A LIRA is a special form of retirement savings account. When you participate in a pension plan through your employer and leave your job, you can establish a LIRA to hold the investments and continue to grow your savings tax-free.

When you quit your job, there may be other options, such as continuing with the pension plan even though you no longer work there. So, be sure to check these out before setting up a LIRA.

What’s the difference between a LIRA and RRSP?

This chart shows the key differences between a LIRA and an RRSP.

Similarities between a LIRA and RRSP

• Tax-free savings vehicles: Both accounts are great ways to save. Any investments you make grow tax-free. You only pay tax when you retire and start withdrawing funds.
• Investment options: You can invest in a wide variety of instruments. For the risk averse, this can include Guaranteed Income Certificates. For those who like to gamble, it could be high-flying technology stocks. Or you could pick middle-of-the-road mutual funds.
• Upon retirement: When you retire must begin drawing money from your retirement savings. Both a LIRA and RRSP have three options, which we will discuss below.

Are there ways to “unlock” a LIRA?

Generally, no. A LIRA is “locked in” until you retire. However, there are a few exceptions that allow you to withdraw funds before retirement:

• You have medical expenses. You have a serious illness and need the funds for medical costs or living expenses.
• Your life expectancy is shortened. You may have been diagnosed with a terminal illness or have a chronic condition that will limit your lifespan.
• You are facing eviction due to an inability to pay your rent.

Can I transfer my LIRA to an RRSP?

No. You can only withdraw the funds in your LIRA in the special circumstances outlined above. You cannot simply make a transfer from your LIRA to an RRSP.

What are my options for my LIRA when I retire?

With a LIRA, your options are similar to an RRSP when you retire. The three choices are:

1. Cash out: You receive a lump sum of cash, less the withholding tax. While this may be tempting, most financial advisers recommend against this. Why? First of all, you will be drawing all of your retirement funds rather than spreading them out over the rest of your life. Secondly, you will face a huge tax hit because the withdrawal will take place in only one year, pushing you into a high tax bracket.
2. You can purchase an annuity: This provides you with a guaranteed income stream every month until you die. It’s guaranteed – so that’s a strength. A key weakness is that this amount is fixed and does not go up over time as consumer prices rise. In addition, when you die the insurance company that sold you the annuity keeps the cash. Your heirs get nothing.
3. You can convert to a LIF: This stands for Life Income Fund. It is the equivalent of converting your RRSP into a Registered Retirement Income Fund. With a LIF, you can continue to make investments after you retire. Each year, you can take out a minimum and maximum amount as set out by the Canadian government. For example, at age 65, you must withdraw at least 4 percent; the maximum is 7.38 percent.

With both an RRSP and a LIRA, you must collapse the account by Dec. 31 of the year you turn 71. You must begin withdrawing the funds using one of the options above.

In summary: LIRA vs RRSP

If you have a LIRA in Canada, count yourself as lucky. It means that your former employer was enlightened enough to set up a retirement plan for you. Only about 37 percent of workers have a workplace plan and the majority of these work in the public sector, such as government and teaching. Yes, there are restrictions with a LIRA but think about the benefit when you retire.

A LIRA and RRSP have a lot of similarities. Both are vehicles that allow you to invest and grow your savings tax-free. You only pay tax when you retire and begin withdrawing funds.

The primary difference between the two accounts is that the funds in a LIRA are “locked in”. On the other hand, you can access the money in your RRSP at any time as long as you are willing to pay the government-mandated withholding tax.