Q: I have a LIRA from my employment some years ago in the amount of $250,000.
I live in Alberta.
Due to downsizing last year, I was laid off. I am now employed but incurred considerable credit card debt and family owed debt while unemployed and would like to gain access to the money. I am 52 years old.
Would I qualify?
A: I’m sorry to hear it has been a tough year, Valerie. I think it’s been a rough one for a lot of Albertans given the price of oil, widespread flooding and the Fort McMurray wildfire. Hopefully, 2017 is better.
Locked-in retirement accounts or LIRAs are not like regular RRSPs. LIRAs come from a transfer of a pension upon leaving an employer, whether from a defined benefit (DB) pension plan or defined contribution (DC) pension plan. You can withdraw from regular RRSPs at any time – LIRAs are different.
Each province has different rules regarding unlocking locked-in accounts. Sometimes, it’s as simple as having a balance below a certain threshold, but generally the unlocking criteria have to do with life events – like financial difficulty.
Since most people work in industries that are not federally regulated – banking, military, civil service, telecommunications and airlines, for example, are subject to federal rules – I’ll stick with the Alberta rules. If your pension comes from a federally regulated industry, you are subject to the federal LIRA regulations.
There are five reasons you can unlock your provincially regulated LIRA in Alberta for financial hardship, Valerie, namely:
1. Low income – You can unlock up to $27,450 in 2016 if your income for the next 12 months will be less than $36,600.
2. Foreclosure – You or your pension partner has been notified of a pending foreclosure on a mortgage or line of credit secured by your primary residence. You can unlock up to the amount overdue plus your legal fees.
3. Eviction for rent arrears – You or your pension partner are being evicted from your primary residence due to rent owed. You can unlock up to the amount of the unpaid rent.
4. First month’s rent and security deposit – You or your pension partner need first month’s rent plus security deposit for a new home where you will live.
5. Medical costs – You, your pension partner or your dependents have out-of-pocket medical expenses not otherwise covered by another source in the past 12 months or the next 12 months. These medical expenses can include a renovation to your home due to an illness or disability. You can unlock up to the amount of the expenses you have paid in the past 12 months or will pay in the next 12 months.
You can only apply once per year for each of the five reasons.
Your “pension partner” – defined in Alberta as someone you are married to or your common-law partner of more than 3 years (or less if you have a child together) – has to sign a waiver form to permit a withdrawal from a LIRA. The reason for the waiver is because a pension partner has rights to some part of that pension in the event of separation or death.
Keep in mind, Valerie, a withdrawal from any registered account, a LIRA included, is generally taxable. Exceptions may apply under programs like the Home Buyer’s Plan and Lifelong Learning Plan, which are not applicable here.
So despite being able to withdraw an amount equal to one of the above eligible expenses, you will have to plan for paying the tax on the withdrawal. Withholding tax rates apply on the withdrawal at source, but when you file your tax return, actual tax rates up to 48% may apply in Alberta.
All that said, since you are more than 50, Valerie, you have another option. You can unlock up to 50% of your LIRA when you start a Life Income Fund (LIF) and begin regular annual withdrawals. A LIF for a LIRA is like a RRIF (Registered Retirement Income Fund) for an RRSP. Typically, you open one in retirement or by age 71 at the latest and begin government-mandated annual minimum withdrawals.
By transferring your LIRA to a LIF and beginning annual withdrawals thereafter, you can simultaneously unlock up to 50% of the account, Valerie. The withdrawals may help you pay down your debts. The question is, should you?
Keep in mind the tax payable. Even if you are in a low or modest tax bracket now, the income inclusion of up to $125,000 – up to half your $250,000 LIRA – could easily push you into a 48% tax bracket. Consider whether the burden of the debt and the cost of the interest is enough to give up a good portion of your retirement savings to the taxman.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.