|Tax deferred and savings plans|
|Government retirement benefits|
Locked-in accounts hold funds originally accumulated through a workplace pension plan. The funds are "locked," as if they were still part of a Defined Benefit pension plan intended to provide a lifetime income. Because locked-in accounts are meant to replicate the lifetime pension plan entitlements formerly enjoyed by the employee, there are strict limits on withdrawals.
Locked-In Retirement Account
A Locked-In Retirement Account (LIRA) is used to hold a lump sum transferred from a pension plan, often when the holder changes jobs. A LIRA operates something like an Registered Retirement Savings Plan (RRSP) (and is sometimes called a "Locked-In RRSP", or LRSP) in that the funds within the plan compound tax free. The major difference is that the funds can not be withdrawn from the LIRA - it is "locked in" under rules depending upon the original pension plan and its terms of registry. To allow access to the funds, the LIRA is usually either converted to a LRIF or LIF (see below) or used to purchase an annuity. However, a partial unlock may be allowed by some provinces, and very small LIRAs can sometimes be deregistered and the amounts transferred to an RRSP. The details vary from jurisdiction to jurisdiction, and depend upon the jurisdiction in which the original pension plan was registered, not the province or territory in which the annuitant lives. For example, if a pension plan is registered in Ontario and the commuted value transferred to a LIRA, Ontario rules apply, even if the annuitant retires in another province. As a further complication, some pension plans are covered by federal, not provincial legislation.
LIRA holders will normally be informed by a company's human resources department which rules apply when they choose the commutation option.
Accessing Locked-In Funds by simultaneous buy and sell
Although an annuitant can not access funds in a LIRA directly, it is possible to access LIRA cash flow by simultaneously selling a security in a non-registered account and rebuying it in the locked account. Although this was previously done by swapping (if the two accounts were at the same brokerage), most brokerages no longer allow swapping.
Suppose Jane has a LIRA, an RRSP, and a non-registered account. The LIRA has a $10000 bond coming due and she would like to access the cash for a major house renovation. She is not allowed to access it directly. However, she has stocks in both her self-directed RRSP and in her non-registered account worth slightly less than $10000 (the amount must be slightly less because she can not contribute additional cash to the LIRA). In her non-registered account, she holds stock in ABC Company with an adjusted cost base of $5000 and a current market value of $9800. If she sells that stock and rebuys it within the LIRA, she will get $9800 of the $10000 the LIRA has in free cash. She will pay two transaction fees and tax on the capital gain she had on ABC Company - that is, tax on about $2400 (50% of the difference between $9800 less the selling fee, and $5000). She could also sell and rebuy a security held in her RRSP with the LIRA, then withdraw funds from the RRSP. In that case, the entire amount withdrawn would be fully taxable.
If a non-registered security with a capital loss is used for the sell and rebuy, the capital loss will be disallowed and can not be used for tax reduction.
LRIFs and LIFs
A LIRA is generally converted to either a Locked-In Retirement Fund (LRIF) or a Life Income Fund (LIF). A LIF originally required the holder to purchase an annuity at age 80. This requirement has generally been eliminated and LRIFs and LIFs are now similar. Both are essentially versions of an Registered Retirement Income Fund (RRIF) with withdrawal limits. Minimum withdrawals are calculated as a percentage of the plan value on January 1 and the plan holder's age on that date, and are the same as those used for an RRIF. Maximum withdrawals are dependent upon bond rates in November of the preceding year, as well as the plan holder's age. The financial institution holding the LRIF or LIF will send a letter to the plan holder in February of each year giving the minimum and maximum withdrawal amounts.
Transferring excess withdrawals to an RRSP
It is possible to access locked-in funds in a LIF or LRIF by withdrawing the maximum allowed amount and transferring the difference between the maximum and minimum amounts to an RRSP.
"Prescribed RRIFs" (PRIFs) are versions of an RRIF that have similar pension creditor proofing and spousal rights to pensions and the same minimum withdrawal percentages as RRIFs, but no maximum withdrawal. They are currently available in Saskatchewan. Manitoba residents may transfer 50% of a locked-in plan to a PRIF.
- Bruce Cohen and Brian Fitzgerald, The Pension Puzzle, 3rd ed., Wiley, 2007, pp. 179-190
- Office of the Superintendent of Financial Institutions Canada, Pension Unlocking FAQ, viewed December 7, 2012.
- Tim Cestnick, Unlock locked-in dollars for more flexibility, Globe and Mail, November 9, 2002.
- Cohen and Fitzgerald, p. 182-183