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From LIRA to LIF to RSP – unlocking funds when the time is right

Often, I get questions about the differences between RSP’s and locked in retirement accounts (LIRA’s). While both share very similar properties, they do have some key differences.  RSP’s were originally introduced so that people who did not have access to a pension plan at work could effectively use an RSP to create their own pension plan.  Traditional pension plans have become less common in the workplace however they still exist, both defined contribution (DC) and defined benefit (DB).  If you have worked at an organization with one of these plans and you leave you have the option to take that pension with you, and the form it takes: a LIRA.

While a LIRA can only hold assets that originated from a pension plan, those funds can be invested in the same eligible investments as an RSP or TFSA.  Once an individual is ready to take income from their LIRA it must be converted to a LIF (Life Income Fund), much like an RSP must be converted to a RIF (retirement income fund).  An individual can convert their RSP to a RIF anytime but in Ontario a LIRA cannot be converted to a LIF until age 55.

The biggest difference between an RSP and a LIRA are the withdrawal limits in retirement.  One can collapse an RSP in its entirety in any given year however LIF’s have a maximum annual withdrawal limit prescribed based on the province of residence. You can see the full LIF min/max withdrawal table HERE

New rules were instituted a few years ago in Ontario allowing those with LIRA’s to unlock 50% of those assets at the time of transferring the LIRA to a LIF.  The unlocked amount can be transferred to an RSP, thereby giving more flexibility in how and when those assets can be withdrawn.  There is specific paperwork that must be filed by your financial advisor and it must be done within 60 days of the setting up of the new LIF.

As usual concepts like this should be recommended by an advisor as everyone’s situation is different. There are additional factors that may influence this type of decision, it’s always best to get professional advice before executing ideas of this nature.  Wishing you all the best this holiday season,

~Rajeev