How to withdraw money from your LIRA before 65?
In theory, savings accumulated in a Locked-in retirement account (LIRA) should stay put until retirement. But there’s a way you can legally withdraw it and get more flexibility.
It’s a strategy that requires patience. You won’t be able to access the entire sum at once. In fact, it’ll take some determination over several years, but you’ll get there.
How it’s done
To withdraw money from your LIRA before the age of 65, follow the steps below (with some extra guidance from your advisor).
- Open a life income fund (LIF), which is like a registered retirement income fund (RRIF).
- Transfer money from your LIRA to your LIF.
- Withdraw the maximum allowed by law. Note: the maximum will depend on several criteria, such as your age.
- Next, invest your savings in a registered retirement savings plan (RRSP).
- Close your LIF.
- Transfer the balance into a new LIRA before the end of the year.
- Repeat these steps each year to access an additional portion of your retirement savings.
Why transfer money from a LIRA to a LIF?
Simply because you can’t withdraw money directly from a LIRA. That’s why you need a LIF. By transferring into an RRSP, you avoid paying tax on the amount you’ve withdrawn.
And by then transferring what’s left into a new LIRA, you’re maximizing the money withdrawn. In fact, the law allows you to transfer the difference between the minimum and maximum withdrawal from a LIF to your RRSP. However, there is no minimum withdrawal in the first year so that you can transfer the maximum. Required minimum withdrawals made in the second year are taxable but are not taxable after that.
You’re probably wondering how much you can withdraw every year. The amount allowed by law depends on your age, your province and the money you’ve accumulated in your LIRA and then transferred to a LIF.
For example, a Quebecer born in 1960 with a LIF of $200,000 can withdraw $13,000 in 2018. For an overview of your personal situation, use the calculator on the Retraite Québec website.
There are some exceptions for maximum withdrawals. If you have a physical or mental condition that has reduced your life expectancy, for example, you will have quicker access to your savings. You must present a medical certificate to your financial institution.
Is a LIRA the same as a locked-in RRSP?
Let start by asking the question, what’s a LIRA account? If you’re employed by a company with a pension plan, and you decide to leave that company, your pension is transferred to a locked-in retirement account. But with an RRSP, anyone who earns an income and wants to save for retirement can open one.
Aside from this, a LIRA and an RRSP are quite similar. In both cases, the accumulated money grows tax-free (meaning that your returns are not taxable). You’ll have to pay tax when you withdraw the money.
Plus, in both cases, you’re obligated to change your savings vehicle before the age of 71, and at this point, you’ll have to draw a retirement income. In fact, you’ll be required to transfer your LIRA to a LIF. An RRSP will become a registered retirement income fund (RRIF). Minimum withdrawals will be taxed, regardless of your financial situation. Withdrawal amounts are the same between a LIF and an RRIF.
The biggest difference between a LIF and an RRIF with the withdrawal limit. There are maximum withdrawal limits for LIFs. The goal is to make sure your money will last until the end of your life – which is reassuring if you tend to overspend.
An RRIF is a more flexible option because it has no maximum withdrawal limit. But with greater flexibility comes the greater risk of blowing through your savings. It requires careful planning.
If you’re in financial trouble, a LIRA would be a safer choice compared to an RRIF. In case of bankruptcy, your LIRA is untouchable. With an RRSP, any contributions made over the previous 12 months could be seized.
What happens to your retirement savings upon your death is also something to consider. A LIRA is automatically transferred to your spouse (if you have one). Otherwise, the money is distributed among your heirs. An RRSP, on the other hand, can be bequeathed to the person of your choice.
Finally, when it comes to married couples, keep in mind that a LIRA and an RRSP are included in the family inheritance. In the event of death, the surviving spouse receives his/her share before the remainder is distributed among other heirs.
Why “unlock” your LIRA?
This strategy is generally used to increase flexibility. You can withdraw your retirement savings as you please, regardless of the withdrawal limit.
You might even consider contributing to your spouse’s RRSP instead of your own. An RRSP allows income splitting before the age of 65. If you withdraw $60,000, for example, you’ll pay more tax than if you and your spouse each withdraw $30,000.
Finally, a LIRA doesn’t qualify for the Home Buyers’ Plan (HBP). You can’t use money withdrawn as a down payment on a house. Same goes for the Lifelong Learning Plan (LLP). If you’d like to participate in these programs, you can transfer money into a regular RRSP and start making your goals come to life.
Attention! Retraite Québec is alerting the public to fraudsters. Using classified ads, they offer several tax-free ways (purchasing stock shares or taking out a loan) to withdraw money from your LIRA or your LIF. Unfortunately, these fraudulent schemes could have significant fiscal consequences, added to the fact that you may never see your money again.
Edited on 11 April 2018