Q: My LIRA is currently valued at $48,000. I am 49 years of age. I am employed part time, with low annual income of about $10,000, but we don’t anticipate needing the money until age 65 to 70. I have always assumed that any investments that can be held in an RRSP can also be held in a LIRA. I am now concerned that this may not be the case. I am also unclear as to how I will access this money in the future. What are the taxation rules and can I switch to an annuity at any time without being taxed?
A: Let’s start with what a LIRA is. A LIRA or Locked-In Retirement Account is an RRSP with restrictions on the use of the funds to ensure it is used for lifetime retirement income. It falls under pension legislation which varies from province to province. Typically the earliest you can withdraw funds from a LIRA is age 55 and it must be rolled into a Life Income Fund (LIF) or used to purchase a life annuity.
Claudia can invest within the LIRA as if it is an RRSP. Choose a mix of investments that are moderate to aggressive given the 15+ years ahead. The funds grow until Claudia decides to convert to either a LIF or Annuity (after age 55) to begin her retirement income.
The age at which to start taking the funds as income needs to be assessed in the context of Claudia’s overall financial resources, her retirement income expectations, and health/longevity. It seems reasonable to wait until age 65 to 70.
Income sourced from LIRA funds is taxable whether it is moved to a LIF or used to purchase a Life Annuity. Tax payable is minimized by drawing the income slowly over many years. A prescribed life annuity further spreads the associated tax payable evenly until end of life.
Funds in a LIF can be used to purchase a Life Annuity. I generally suggest converting a LIRA to a LIF initially and then later purchasing a life annuity. The older you are the more mortality credits you have (less years left to live) so the insurance company will offer a higher monthly annuity income.
Tom Feigs is a fee-for-service financial planner, money coach and retirement planning expert based in Calgary, Alberta.
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