Q: What's a LIRA?
A: It's an account that lets you roll over money from a pension account after you leave your job.
So, what is it exactly? Say you’re one of the lucky Canadians with a company pension. You’re about to get a new job, but you’re worried about what you’re going to do with your pension. Sounds like you’re someone who’s waiting to find out about LIRAs!
If you’re not excited by acronyms that sound like former European currencies, you can just call them Locked-In Retirement Accounts. Technically, it’s a rolled-over retirement account. You can’t contribute to it once it’s converted to a LIRA, but you do have control over the investments. If you quit a job at which you’ve got a pension (or if you get laid off from such a job), your pension will be converted to a LIRA.
At retirement, LIRAs can be used to purchase retirement income (through LIFs, which are similar to RRIFs) or converted into an annuity. Like an RRSP, a LIRA must be closed by December 31 of the year that you turn 71.
What are the pros? When you open a LIRA the money you invest is quite difficult to withdraw. This is a pro for those of us who need a little help with self-restraint. Savvy investors will also like that they can manage the funds themselves rather than having to rely on their former company to be good stewards of their money.
Is there anything to be careful about? Watch out for high management fees charged on LIRAs - these diminish the amount you save. Some traditional brick and mortar banks charge high fees for LIRA accounts. You can avail of lower fee LIRAs by opening or transferring your LIRA to an online investment provider.
You’ve got to be aware of the regulations. These vary from province to province, when it comes to things like when and how the money can be withdrawn. That can make planning for retirement a bit of a headache.
And just as it’s a boon to spendaholics, it’s a con for those who find themselves in dire need of their cash. In cases of severe financial hardship, LIRA funds can sometimes be used, but the conditions to do so vary depending on province. People who are looking to use their LIRA money to go back to school or as part of a down payment on a house will be disappointed: It’s not permitted.