The process of unlocking a LIRA account in Canada

I have a federally regulated LIRA. I’m 55. I’m looking to unlock 50% of the balance. I came across your article while seeking some LIRA/LIF/RRSP information. 

I’m getting conflicting information regarding the process. One site indicates it is possible to transfer the one-time 50% directly from a LIRA to an RRSP. If possible, this would be preferable. This was also indicated by my discount broker but I’m having some trust issues with them.

Another indicates this is done via a LIF and also requires the entire balance of the LIRA to be transferred into the LIF. It then goes on to suggest transferring the unused 50% in the LIF into a new LIRA before one year. 

Yet another indicates it must go into a LIF and I must start drawing from the LIF each year (starting year 2) in addition to taking the 50% one-time amount out.

Additionally, I understand that emergency withdrawals are possible as well as transferring a portion to an RESP for school expenses. I’m contemplating some schooling (mine) and perhaps having a contingency plan if some emergency cash is required while attending school.

—Warren

How to unlock a LIRA account

We get a lot of questions from Canadians about unlocking locked-in retirement accounts (LIRAs), Warren. So, your confusion is warranted. 

In your case, you have a locked-in retirement account (LIRA) that came from a transfer out of a federally regulated pension plan. You are 55 and want to unlock some of those funds. 

If a federal LIRA account holder is 55 or older, they can consider a one-time unlocking of up to 50% of the balance, but there are some steps involved first. 

You need to be 55 or older during the calendar year of the request, so you can actually be 54, if your 55th birthday is later in the year. 

You cannot take the withdrawal directly from the LIRA. You need to first transfer some or all of it on a tax deferred basis to a restricted life income fund (RLIF). The 50% maximum is determined based on the RLIF account value on the date the withdrawal is taken from the account. So, you would need to transfer your entire LIRA to access the maximum amount. 

The unlocking portion can be taken in cash (fully taxable) or transferred to another registered retirement account, generally a registered retirement savings plan (RRSP). 

RRSPs have no limits on withdrawals so can be fully withdrawn at any time. The unlocking needs to occur within 60 days of the deposit to the RLIF. So, the information you found, Warren, that says you can transfer funds from a LIRA to a RRSP is partially correct—it was just missing the RLIF step.

The remaining locked-in RLIF funds will be subject to minimum annual withdrawals in the following year based on government formulas. If you are 55 at the start of the subsequent year, for example, you must withdraw 2.86% of the balance on December 31 of the previous year. This minimum increases each year. Withdrawals are fully taxable income. 

What is an RLSP?

If you do not want to have annual withdrawals from your RLIF after unlocking some of the balance, you can transfer the balance to a restricted locked-in savings plan (RLSP). This is similar to a LIRA, but the restricted reference denotes the fact the account has already had a one-time unlocking of funds and cannot be unlocked again. 

The information you found, Warren, that says you have to take LIF withdrawals after transferring LIRA funds to a RLIF was correct—unless you transfer the RLIF funds back to a RLSP.

LIRAs and RLSPs do not have annual withdrawals and can remain tax deferred until the end of the year, when an account holder turns 71. At that time, the account needs to be converted to a life income fund (LIF) or a locked-in retirement income fund (LRIF) with minimum withdrawals thereafter, or alternatively used to buy a life annuity from an insurance company that makes ongoing payments. 

Unlocking a LIRA in Ontario or any other province

There are other ways a LIRA can be unlocked. The rules vary based on whether the LIRA is from a federally or provincially regulated pension and each province has different rules. 

Common circumstances include: Small balances below a dollar threshold; leaving Canada and becoming a non-resident; having a shortened life expectancy; undergoing severe financial hardship subject to specific criteria; or family law requirements, like spousal or child support enforcement orders. 

Transferring funds from LIRA to RESP

There is no specific option to transfer funds from a LIRA to a registered education savings plan (RESP), Warren. An RESP is used to save for post-secondary education with the primary benefit being 20% government Canada Education Savings Grants on up to $2,500 of annual contributions (plus up to one previously missed year) up until a beneficiary’s age 17. 

You can open an RESP for an adult, including yourself, but I do not think that is necessarily a solution to your LIRA unlocking. 

You may be confusing the ability to transfer unused RESP funds to an RRSP under certain circumstances. Or to take a lifelong learning plan (LLP) withdrawal from an RRSP to pay for post-secondary education under certain circumstances. 

I hope this helps, Warren. The most reliable source of online information for federal LIRAs is from the Office of the Superintendent of Financial Institutions. Each province will have information for provincially regulated LIRAs, like the Financial Services Commission of Ontario, for example, for Ontario accounts. 

Good luck.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. If you have a question for Jason, please send it to [email protected].

More from Jason Heath:

• Do you pay capital gains tax when separating or divorcing?
• How do the RRSP contribution carry forward rules work?
• How to avoid OAS clawbacks when you’ve had a temporary increase in income
• Would a senior get a tax credit for selling their house if they move out?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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