Unlock Your LIRA and Upgrade Your Lifestyle

Many Canadians have transferred a pension from a former employer and have some form of “locked-in” account such as a LIRA or LRSP, which is purposely set up to limit their access to those funds until around retirement age. While the intention is to ensure that money is there provide income in retirement, sometimes it would be more beneficial to have early access to simply cover the cost of living, and unexpected expense, or for retirement tax planning. While this article specifically refers to the unlocking provisions of locked-in plans that are under Manitoba pension legislation, different provisions may be in effect for other provinces or for federally-governed pensions.

For Manitoba-jurisdiction LIRAs, there are two primary unlocking provisions that allow for much more flexibility in accessing those funds than if they were to stay fully locked-in:

1. 50% unlocking and transfer to a PRIF starting at age 55
   
   • the PRIF account functions essentially the same as a regular RRIF account
   • a minimum payment (% of account value, based on age) must be taken annually, and there is no annual maximum limit on payments (other than the value of the account)
   • the 50% that is not unlocked stays either in a LIF account, where you have to take an annual payment within a Minimum and Maximum range, or in the original LIRA where no annual payments are required to be take
2. full unlocking at age 65
   
   • this provision was added in the past few years, and fully removes the maximum annual payment limit
   • the funds in the LIRA are transferred to a standard RRIF, which requires a minimum annual payment to be taken, but does not have a maximum annual payment limit

From Locked-In to Tax-Free

While these unlocking provisions allow more access to those previously locked-in funds for income purposes, they can also be very useful from a tax and/or retirement planning standpoint. For those with a very large LIRA balance, it may make sense to start doing a “LIRA meltdown” strategy, where money is transferred from the locked-in account (minus withholding tax) to a TFSA and/or non-registered account on an annual basis. This is done primarily to have registered money taxed annually at a lower tax rate than it potentially all becoming taxable in one year at a much higher tax rate. The amount that would be “de-registered” each year would be based on your annual income, current tax brackets, and the balance in your LIRA, rather than how much you need for income. This meltdown strategy could result in paying taxes in the 33% (or lower) marginal bracket on the entire LIRA balance, rather than potentially in the 43-50% tax bracket range if you passed away with a large LIRA balance and no spouse as your beneficiary.

Lifestyle Upgrade

As your LIRA is gradually converted to being held in your TFSA, it can be invested to generate monthly income, which gets paid out to you as a monthly tax-free “payday". If you have enough money still left in your LIRA once your TFSA contribution limit is maxed out, the remaining LIRA proceeds can be invested in a non-registered account, which can also be invested to generate monthly income which you can pay yourself. While not tax-free, certain income-paying mutual funds and ETFs have their distributions taxed as capital gains, so only half of the income you receive is taxable.

This is the most fun part of the whole process, and where the lifestyle upgrade comes in. Whether it is a few hundred dollars extra per month, or a few thousand, this extra income gives you the opportunity to treat yourself and enjoy some of life’s luxuries you normally wouldn’t. Maybe it is going out for a meal a few more times per month, buying some new clothes, going out to a concert or sporting event, buying a new car or even possibly living in a nicer house. Everyone has their own list of things they’d spend on if they had extra income every month, so what are some of the things you would splurge on?

The main trade-off to receiving this income is that the income-generating accounts will not see much growth going forward, as they are paying out most or all of the income that is being generated, rather than it being reinvested. On the other hand, the account values also generally will not decline by much either (over the long term), as you are not selling off any of the investment each month to fund the monthly payday, you are simply “living off the interest”.

Leave some money for your future self

Unlocking pension money can be a double-edged sword, however. While it can help you cover bills when you’re in a bind, or you can use it to generate extra discretionary monthly income, it also makes it much easier to burn through the funds that are supposed to support you in your golden years. Careful management and planning is paramount when unlocking pension accounts, and expert advice is highly recommended to make sure you have a sustainable plan for the long run.

If you have locked-in money that you would like to discuss unlocking the potential of, please contact me and to see how you might be able to upgrade your own lifestyle.

If you have locked-in money that you would like to discuss unlocking the potential of, please contact me
to see how you might be able to upgrade your own lifestyle. Whether you’re in Winnipeg, Brandon, or Vancouver, our team can help you get started.

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This information has been prepared by Dennis Rubeniuk who is a investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this post comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and a business name under which iA Private Wealth Inc. operates