What is a LIRA? A complete guide to locked-in retirement accounts in Canada

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By Noel Moffatt

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Updated: November 06, 2024

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What is a LIRA (locked-in retirement account)?

A Locked-In Retirement Account (LIRA) is a Canadian retirement savings account designed to hold pension funds when you leave a job. Picture it as a holding area for your pension money that you can’t touch until you’re closer to retirement.

When you switch jobs or leave an employer that provided a pension plan, you can transfer your pension into a LIRA. It’s like taking your pension benefits with you, but with a catch — the funds are locked in. This means you can’t withdraw the money freely like with a typical Registered Retirement Savings Plan (RRSP). The LIRA keeps the funds growing in a tax-sheltered environment until you’re officially closer to retirement age —usually at 55 or older.

Of course, there are a few rare exceptions for early access, such as financial hardship or certain medical conditions, but, for the most part, a LIRA is all about locking away that cash until it’s time to start enjoying your retirement. In the meantime, the money stays in the account, growing tax-deferred, just waiting for that future “you” to reap the rewards.

So, it’s a great way to safeguard your retirement funds and ensure they’re out of sight, out of mind and steadily growing for when you’ll need them.

How to unlock your LIRA and use your money your way

Okay, so here's the deal, if you’ve got a Locked-In Retirement Account and it’s finally time to access those funds, you’ll need to jump through a few hoops first (and there's no way around this).

The main way to unlock your LIRA is to convert it into either a Life Income Fund (LIF) or a life annuity¹.  This typically happens when you hit retirement age (usually around 55 or older) and are ready to start pulling out some of that hard-earned retirement money.

What is a LIF and how does it relate to a LIRA?

A LIF is an account specifically designed for those transitioning from saving for retirement to withdrawing income during retirement. Think of it like a Registered Retirement Income Fund (RRIF), but with a twist: LIFs come with annual minimum and maximum withdrawal limits, ensuring you don’t burn through your retirement savings too quickly (this is a good thing!).

Converting your LIRA into a LIF is pretty straightforward. Once you reach retirement age, you’ll work with your financial institution to transfer your LIRA balance into a LIF. This allows you to withdraw portions of your funds while keeping the rest invested for potential growth. Alternatively, if you prefer a steady, guaranteed income for life, you can convert your LIRA into a life annuity instead. The choice depends on whether you want more flexibility or prefer the peace of mind of a guaranteed income stream.

LIF withdrawals

Now, let’s talk about LIF withdrawals, where things get a bit more structured.

Each year, you’re required to withdraw at least the minimum amount, determined by your age. But there’s also a cap on how much you can withdraw annually. These limits are designed to make sure you don’t deplete your retirement funds too quickly. Unlike a LIRA, which keeps your funds locked up tightly until retirement, a LIF gives you more control over your money while still ensuring it lasts throughout your retirement. 

So, with a LIF, you get the best of both worlds: Flexibility with your withdrawals and the security of having your savings protected for the long haul.

LIRA vs. RRSP: Key differences

When mapping out your retirement plan, it’s important to know the difference between a Locked-In Retirement Account and an RRSP. They both have their perks, but they’re used for different things and come with different levels of flexibility.

Purpose and flexibility

A LIRA is like a savings account, equivalent to a vault. You can’t add more money to it, and accessing it before you hit that age is basically a no-go, with few exceptions. It’s just there to keep your pension money safe until you’re ready to use it for retirement income.

Now, an RRSP? That’s like the cool cousin who lets you do whatever you want (well, to a point, of course). You can keep adding money to it (up until you’re 71), withdraw whenever you like (though the taxman will come knocking) and even use it for big-ticket items like a first home or going back to school. It’s way more versatile, and you’ve got a lot more control over when and how you use the funds.

Investment strategy differences

In terms of what you can invest in, both LIRAs and RRSPs let you pick from the same basket — mutual funds, stocks, bonds, GICs. However, the way you approach those investments might differ.

With an RRSP, you can keep contributing and adjusting your investments as you go, which opens the door to a more dynamic strategy. You could start out aggressive in your 30s, going all-in on growth stocks, and then dial it back with safer investments as you near retirement.

On the flip side, a LIRA is more like, “set it and forget it” — since you can’t add to it or take anything out for a long time. That means the focus is usually on stable, long-term growth. You’re not looking to take huge risks with these funds because you won’t be able to touch them until later in life.

Pros and cons of a LIRA vs. an RRSP

LIRA pros and cons

Pros

• Keeps your pension savings safe until you’re actually ready to retire

• Helps grow your funds tax-deferred, just like an RRSP

• Locked-in funds mean you’re less tempted to dip into your retirement before you should

Cons

• Zero flexibility in adding more money

• Withdrawals are basically off the table until you’re 55+ (unless it’s a hardship case)

• You’ll need to convert the LIRA to a LIF or annuity by 71, which limits how much you can take out each year

RRSP pros and cons

Pros

• Total flexibility with contributions and withdrawals

• Can be used for special programs like buying your first home or returning to school

• You get a sweet tax deduction for contributions, and the funds grow tax-deferred until you withdraw

Cons

• Easy access means it’s tempting to take out funds early, which can mess up your long-term plan

• Withdrawals count as income, so you could bump into a higher tax bracket

Transfer LIRA to RRSP: Eligibility rules

Switching from a LIRA to an RRSP directly isn’t usually possible due to the locked-in nature of LIRA funds. 

However, in certain circumstances, you can transfer up to 50% of your LIRA to an RRSP once you reach the age of 55 (depending on your province's regulations). This process involves converting the LIRA into a LIF first, then making the transfer.

For example, if you're 55 and want more flexibility with half of your LIRA funds, you could unlock 50% of the LIRA by moving it to an RRSP. This would give you more control over withdrawals, investment choices and tax planning.

When converting a LIRA to an RRSP might make sense:

• You’ve reached 55 and want access to some of your retirement funds for more flexibility
• You’re looking to manage tax liabilities and prefer strategically using the unlocked funds in an RRSP

In summary, while both a LIRA and RRSP can be valuable tools for retirement savings, their differences in flexibility, purpose and investment strategy can help guide your decision on which one suits your needs better.

Types of investments allowed in a LIRA vs. non-registered vs. RRSP

When you're sorting out your retirement, knowing what you can invest in across different accounts is pretty much the key to success. LIRA, RRSP and non-registered accounts all offer different ways to invest, but each comes with its own quirks around flexibility, taxes and growth potential.

With a LIRA, you’re looking at a solid lineup of investment options — think mutual funds, ETFs, stocks, bonds and pretty much the same stuff you can have in an RRSP. This is great because it means you’ve got some control over your retirement money and the potential to get better returns if you’re playing the long game. But heads up — because LIRA funds are locked until you hit retirement age, it’s not the most flexible setup. It’s one of those things where you’ll want to keep your timeline and how much risk you can bear when picking investments.

Meanwhile, non-registered accounts let you withdraw your cash more easily, but there’s a catch — you lose out on those sweet tax-deferred perks that LIRAs and RRSPs offer. Any gains you make are taxed each year, which can take a bite out of your overall growth. So, while non-registered accounts are more flexible, they’re also a bit of a buzzkill when it comes to taxes.

Growth potential in a LIRA vs. pension plan

One major perk of moving your pension funds into a LIRA is that you finally get to be the one calling the shots on where your money goes. Pension plans are typically stable, sure, but they're also limited in terms of investment options, and they tend to play it safe. 

By using a LIRA, you can tap into more growth-focused investments like stocks or ETFs, which may give you the chance to earn higher returns over time. That being said, it’s not all good — taking control means you’re also taking on more risk, so if you're closing in on retirement, this may not be the best move. 

Risk management considerations

Your investment strategy should match up with your retirement plans and how far off they are. If you've got a few decades to go before retiring, leaning into growth investments like stocks or ETFs² may be a good call since you've got time to weather the market’s ups and downs. But if you're nearing retirement, playing it safer with things like bonds or GICs could help protect the money you’ve already built up. 

And keep in mind — provincial rules around early withdrawals or unlocking a LIRA can vary, so it’s crucial to align your strategy with both your retirement goals and the specific regulations in your province.

Maximizing your retirement savings

As you approach retirement, it's a good idea to take a step back and make sure your LIRA is still doing its job. Retirement is a marathon, not a sprint, so the game plan you had a few years ago may need some fine-tuning. If your investments are too conservative or they don’t match your current risk appetite, you could be leaving growth potential on the table. A quick review can ensure your LIRA is on track for the long haul.

Now, if you have more flexibility in handling your retirement savings, consider moving your LIRA over to an RRSP (assuming you qualify). 

Why? 

An RRSP gives you way more wiggle room with investment choices and fewer hoops to jump through. Plus, it can let you keep contributing to your retirement stash while managing withdrawals more on your terms. That sounds pretty good if you want more control over your future nest egg, right?

Speaking of control, if you’re the DIY type, opening a self-directed investment account with something like Questrade or Wealthsimple may be just the ticket. These platforms give you the keys to the kingdom — stocks, ETFs, bonds, you name it. 

Feature	Questrade	Wealthsimple
-
Investment Options	Stocks, ETFs, bonds, mutual funds, GICs	Stocks, ETFs, bonds, robo-advisory
Control Level	Full control over all investments	Full control (self-directed) or automated (robo-advisor)
Fees	Low trading fees; $0 on ETFs to buy	Low trading fees; $0 on ETFs to buy
Ease of Use	Easy moderate (better for experienced traders)	Beginner-friendly, easy-to-navigate
Account Types Available	RRSP, TFSA, non-registered, LIRA, RESP	RRSP, TFSA, non-registered, LIRA, RESP
Additional Features	Advanced research tools, margin accounts	Robo-advisor service, fractional shares
Best For	DIY investors looking for deep control	Beginners or those who prefer a hands-off approach
Read review	Questrade review	Wealthsimple review
Get started	DIY your investments	Invest on auto-pilot

You’re in the driver’s seat, making the calls on how to grow and protect your retirement portfolio. The more control you have, the better you can tweak things to max out your growth potential while managing risks.

Ready to take your retirement game to the next level? Here are some handy guides to help you fine-tune your strategy:

• Top investment strategies for retirement
• Best RRSP accounts in Canada

These resources will set you up for success, regardless of your retirement goals.

FAQs

Noel Moffatt Writer

Noel Moffatt Writer

Noel Moffatt is a Canadian fintech expert with a passion for simplifying personal finance. Based in St. John’s, NL, he draws on his background in finance, SEO, and writing to deliver clear explanations and actionable advice. Noel is dedicated to equipping readers with the knowledge and tools they need to make informed financial decisions, striving to make personal finance more accessible and understandable through his in-depth articles and reviews.

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