LIRAs (locked-in retirement accounts) and RRSPs (registered retirement savings plans) are two popular retirement savings plans in Canada.
Both plans offer tax-deferred growth, meaning that you don’t have to pay taxes on your investment earnings until you withdraw the money in retirement. However, there are some key differences between the two plans, such as eligibility, contributions, withdrawals, and investment options.
LIRAs and RRSPs are both good retirement savings options, but they have different benefits and drawbacks. Here, we’ll compare LIRA vs. RRSP, so you can get a full understanding of both.
LIRA vs RRSP: A Practical Comparison
LIRAs and RRSPs are two popular retirement savings plans in Canada. Both plans offer tax-deferred growth, meaning that you do not have to pay taxes on your investment earnings until you withdraw the money.
However, there are some key differences between the two plans that you should consider.
Overview
Retirement savings plans are an important part of financial planning. By saving for retirement early, you can ensure that you have enough money to live comfortably in your retirement years.
Let’s start by asking the basic questions about LIRA and RRSP.
| Feature | LIRA | RRSP |
| Eligibility | Must have pension benefits to transfer | Must be a Canadian resident under 71 |
| Contributions | Can only contribute pension benefits | Can contribute up to 18% of earned income, up to a maximum |
| Withdrawals | Can only withdraw money after retirement | Can withdraw money at any time |
| Minimum withdrawal requirement | Yes | No |
| Taxes on withdrawals | May be payable | Payable |
| Investment options | Wide range | Wide range |
| Flexibility | Less flexible | More flexible |
| Additional benefits | May be able to transfer pension benefits from a deceased spouse or common-law partner | May be able to use funds for the Home Buyers’ Plan or Lifelong Learning Plan |
What is a LIRA?
LIRA stands for Locked In Retirement Account. A LIRA is a type of retirement savings plan that is typically created when you leave a job and transfer your pension benefits to a LIRA. You can only contribute pension benefits to a LIRA. You cannot make contributions from your earned income.
You can start withdrawing money from your LIRA after you have retired. However, you may have to pay taxes on your withdrawals. The amount of tax you pay will depend on your age and income.
What is an RRSP?
RRSP stands for Registered Retirement Savings Plan. An RRSP is a type of retirement savings plan that allows you to save for retirement on a tax-deferred basis. This means that you do not have to pay taxes on your contributions or investment earnings until you withdraw the money.
You can contribute up to 18% of your earned income to your RRSP each year, up to a maximum contribution limit. You can start withdrawing money from your RRSP at any time, but you will have to pay taxes on the withdrawals.
Eligibility
LIRAs and RRSPs have different eligibility requirements. LIRAs are typically used to hold pension benefits that have been transferred from a previous job, while RRSPs are more general-purpose retirement savings plans.
Who Is Eligible for a LIRA?
To be eligible for a LIRA, you must have pension benefits that you want to transfer from a previous job. You can transfer your pension benefits to a LIRA when you leave your job, retire, or turn 55 (whichever comes first).
You should also be a resident of Canada, and, under the age of 71. Examples of people who are eligible for a LIRA include individuals with multiple pension plans who want to consolidate them into a single LIRA, and people receiving a pension from a deceased spouse or common-law partner.
Who Is Eligible for an RRSP?
To be eligible for an RRSP, you must be a Canadian resident under the age of 71. You can contribute to an RRSP up to the end of the year in which you turn 71.
There are no other income or employment requirements for RRSP eligibility. This means that anyone who is a Canadian resident and under the age of 71 can open and contribute to an RRSP, regardless of their employment status or income level.
Examples of people who are eligible for an RRSP include employed individuals, self-employed individuals, students, stay-at-home parents, and people with disabilities.
Contributions and Withdrawals
Contribution and withdrawal rules are important to consider when choosing between a LIRA and an RRSP because they affect how much money you can contribute to your plan each year and when you can access your savings.
How Are Contributions and Withdrawals Done in a LIRA?
Contributions: You can only contribute pension benefits to a LIRA. You cannot make contributions from your earned income.
Withdrawals: You can only start withdrawing money from your LIRA after you have retired. However, you will have to pay taxes on your withdrawals. The amount of tax you pay will depend on your other sources of income.
LIRA Contribution Rules
- You can only contribute pension benefits to a LIRA.
- You cannot make contributions from your earned income.
- There is no annual contribution limit for LIRA.
- You can contribute pension benefits to your LIRA at any time, up to the end of the year in which you turn 71.
LIRA Withdrawal Rules
- You can only start withdrawing money from your LIRA after you have retired.
- You must withdraw a minimum amount of money from your LIRA each year. The minimum withdrawal amount is based on your age and the value of your LIRA.
- You may have to pay taxes on your LIRA withdrawals. The amount of tax you pay will depend on your age and income.
How Are Contributions and Withdrawals Done in an RRSP?
Contributions: You can contribute up to 18% of your earned income to your RRSP each year, up to a maximum contribution limit. Your RRSP contributions are tax-deductible, meaning that you can reduce your taxable income for the year by the amount of your contributions.
Withdrawals: You can start withdrawing money from your RRSP at any time. However, you will have to pay taxes on your withdrawals. The amount of tax you pay will depend on your other sources of income.
RRSP Contribution Rules
- You can contribute up to 18% of your earned income to your RRSP each year, up to a maximum contribution limit.
- Your RRSP contributions are tax-deductible.
- You can contribute to your RRSP up to the end of the year in which you turn 71.
RRSP Withdrawal Rules
- You can start withdrawing money from your RRSP at any time.
- You will have to pay taxes on your RRSP withdrawals. The amount of tax you pay will depend on other sources of income.
Investment Options
Both LIRAs and RRSPs offer a wide range of investment options. However, there are some differences in the way that certain investment options are treated in each plan.
It is important to diversify your investment portfolio by investing in a variety of asset classes. This will help to reduce your risk if one asset class performs poorly.
You should also review your investment portfolio regularly and make adjustments as needed. Your investment needs may change over time, such as if you get married, have children, or change jobs.
What Are the Investment Options in a LIRA?
LIRAs offer a wide range of investment options, including:
- Stocks
- Bonds
- Mutual funds
- ETFs
- GICs
- Cash
- Other investment products that are approved by your LIRA provider
What are the Investment Options in an RRSP?
RRSPs also offer a wide range of investment options, including:
- Stocks
- Bonds
- Mutual funds
- ETFs
- GICs
- Cash
- Other investment products that are approved by your RRSP provider
Tax Implications
Both LIRAs and RRSPs offer tax-deferred growth, but they have different tax implications. RRSP contributions are tax-deductible, while LIRA contributions are not. However, you may have to pay taxes on your LIRA withdrawals, depending on your age and income.
What Are the Tax Implications of a LIRA?
LIRA withdrawals are subject to income tax at the same rate as your other income. This means that if you withdraw a large amount of money from your LIRA in a single year, you may be pushed into a higher tax bracket and end up paying more taxes. It’s usually best to withdraw funds over multiple years to reduce the tax you’ll pay.
What Are the Tax Implications of an RRSP?
RRSP withdrawals are also subject to income tax at the same rate as your other income. However, there are a few ways to reduce the amount of tax you pay on your RRSP withdrawals:
- Income splitting: If you are married or in a common-law relationship, you may be able to split your RRSP income with your spouse or partner. This can help to reduce your overall tax bill if your spouse or partner is in a lower tax bracket than you are.
- RRIFs: You can also transfer your RRSP savings to a Registered Retirement Income Fund (RRIF) after you retire. RRIFs allow you to withdraw money from your savings on a regular basis, and the withdrawals are taxed as income. However, you can choose the amount of money you withdraw each year, which gives you more control over your tax bill.
- Life Annuity: You can also purchase an annuity with your RRSP savings. An annuity is a type of insurance contract that guarantees you a certain income for a set period of time or for life. Annuity payments are taxed as income, but you can choose the frequency of your payments, which gives you more control over your tax bill.