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

Why should I keep my LIRA?

Before even getting into the concept of withdrawals, a Locked-In Retirement Account (LIRA) is only recognized as such if the money deposited in it comes from a pension plan and the employer is under provincial jurisdiction. If the pension plan is under federal jurisdiction (banking, telecommunications, aviation and others), it’s not called a LIRA, but rather a Locked-In Retirement Savings Plan (LRSP).

The conditions that apply to unlocking a LIRA or a Locked-In RRSP vary by jurisdiction. In Quebec, no amount can be transferred directly from an LIF to an RRSP or to a Registered Retirement Income Fund (RRIF). In other words, it’s not possible to unlock your LIRA for the benefit of the RRSP in Quebec.

You may have come across tempting offers or even schemes that allow immediate access to the balance of your locked-in accounts. If it's too good to be true, you should be wary of it. Here are some reasons to keep your LIRA:

Your LIRA is designed to support you throughout 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 convert it to a Life Income Fund (LIF). The LIF has a minimum and maximum withdrawal amount that must be met annually – apart from Quebec where there is no annual maximum withdrawal for people aged 55 and over. In general, one might think that it’s better to untie your LIRA to avoid these constraints.

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. For some people, a good strategy is to withdraw less than the annual maximum from their LIRA, just what you really need. This makes it possible to limit the taxes to be paid and to extend withdrawals over time. Essentially, a LIRA is a bit like a Registered Retirement Savings Plan (RRSP), only with more restrictions. 

In short, choosing to unlock your LIRA means choosing to accelerate withdrawals and risk finding yourself with less income more quickly in retirement.

→ To better understand the intricacies between LIRAs and LIFs, see our article: What is the difference between LIRAs, LIFs and life annuities?

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
• 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 pass away

The 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).

When 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 recognized spouse 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,   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. 

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

The Guaranteed Income Supplement (GIS) is provided by the Government of Canada (external link) 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 to an RRSP. It would help avoid the mandatory minimum withdrawals from the LIF, thereby reducing your taxable income and possibly giving you access to the GIS. However, this option is not available as of December 31 of the year you turn 71, since this is the age limit for holding an RRSP.

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.

But this is only ever suggested in cases of emergency; 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? 

Do you live in a province other than Quebec and are in one of the above situations? To withdraw money from your LIRA for RRSP, follow these steps with the help of your advisor:

• Open a Life Income Fund (LIF).
• Transfer the money in your LIRA to an LIF.
• Withdraw the maximum amount authorized by law from the LIF. Note that the maximum amount depends on several criteria, such as your age.
• Invest this amount in a Registered Retirement Savings Plan (RRSP).
• Transfer the LIF balance to a new LIRA before the end of the year.
• 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. Then, transferring the LIF balance back to a new LIRA will allow you to avoid receiving annual income from 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.