Locked-In Retirement Accounts (LIRAs) & Life Income Funds (LIFs) are accounts that have been established with funds transferred out of a company pension plan to provide income during retirement.
Locked-in assets are registered and tax-deferred under the Income Tax Act (ITA) and are also subject to applicable pension legislation to protect spousal rights and lifetime income. When pension assets are unlocked, the funds are no longer subject to pension legislation. They can generally remain tax-deferred with a transfer to an RRSP or RRIF, or withdrawn as taxable cash.
Despite the long-term intentions of a locked-in account, there are specific situations where the account holder may be eligible to unlock their funds prematurely. The funds in your locked-in account originated from an employer-sponsored pension plan which was established with the intent of providing lifetime retirement income for both you and your spouse or common-law partner. As a result, when certain changes are made to these proceeds, your spouse, common-law partner, or more specifically "pension partner", has to sign a waiver form to permit these changes or waive their right to certain benefits.
The Alberta Employment Pension Plans Act and Alberta Employment Pension Plans Regulation provide for five specific circumstances when funds in an Alberta regulated locked-in account can be unlocked:
1. Considerably shortened life expectancy
If you have a disability that will shorten your life or a terminal illness, you may be able to unlock your locked-in assets. Your pension partner would have to sign a waiver form and your doctor must write a letter that states you are expected to have a considerably shortened life. The letter does not need to state the type of disability or illness, or how long you will live.The waiver and doctor’s letter will need to be provided to the financial institution that holds your locked-in account.
2. Access to small amounts
Sometimes the money in a LIRA, LIF is considered too small to provide long-term income. This small amount may be unlocked if you meet the threshold that is based on your age and the Year’s Maximum Pensionable Earnings (YMPE). The YMPE is set each year by the Government of Canada. For 2022:
- If you are under age 65 and the amount in any single locked-in account is less than $12,980 on the day you ask for the withdrawal, the account can be unlocked (less than 20% of the YMPE).
- If you are age 65 or older and the amount in any single locked-in account is less than $25,960 on the day you ask for the withdrawal, the account can be unlocked (less than 40% of the YMPE).
If your locked-in account is below the threshold, you can apply through the financial institution to unlock the account. There is no pension partner waiver required as the amount is too small to provide a lifetime retirement income.
3. 50% unlocking
If you are aged 50 or older, Alberta pension legislation permits you to unlock up to 50% of the funds in your LIRA prior to transferring the remainder of the funds to a LIF. Your pension partner would have to sign a waiver form. The money is unlocked by the financial institution that holds your LIRA.
However, this is a “one-time only” choice. Although you may unlock less than 50% of the account, you’re not allowed to unlock again at a later date. For example, if you choose to unlock only 30% of your locked-in funds, you cannot later unlock another 20%. The money is unlocked because you have chosen to start receiving an income. You cannot transfer the money back to a LIRA after funds have been transferred to a LIF.
After unlocking the 50%, you may unlock the rest of the account if the funds left are less than the small amount threshold (see above). In this case, because you’re essentially able to unlock the entire account, the funds do not have to be transferred to a LIF first.
4. Becoming a non-resident of Canada
If the Canada Revenue Agency (CRA) determines that you’re a non-resident of Canada for tax purposes, and confirms this in writing, then you may unlock your LIRA or LIF. You can apply by completing CRA Form NR-73, Determination of Residency Status and CRA will send you a letter providing an opinion on your residency status. To unlock your locked-in accounts, you must provide your financial institution a copy of the CRA letter and the applicable waiver form signed by your pension partner.
5. Financial hardship
If you find yourself in one of the following five situations of financial hardship, you may be eligible to unlock money in your LIRA or LIF. You apply to the financial institution that holds your account to unlock the money. You may apply for each of these reasons only once per account in a calendar year.
- Low income - In 2022, if your income for the next twelve months will be less than $43,267, you may be eligible to unlock up to $32,450.
- Foreclosure - If you or your pension partner have received a letter threatening foreclosure on a debt secured against your main home. The most you can unlock is the overdue amount owing including legal fees.
- Eviction for rent arrears - If you or your pension partner are being evicted from your main home because you owe rent. The most you can unlock is the amount of unpaid rent.
- First month’s rent & security deposit - If you or your pension partner need the first month’s rent and security deposit on a new home you will be moving into.
- Medical costs & renovation - If you, your pension partner or dependants, in the past and/or next 12 months have medical expenses not covered by a medical plan or any other source, and/or you have or will be making alterations to your main home due to the illness or disability of you, your pension partner or dependant. The most you can unlock is the expense you have paid or will pay in the past or next 12 months.
Additional details and the application form are available on the Alberta Government website, Summary of financial hardship unlocking: general program and process.
Locked-in accounts governed by other jurisdictions have different rules for unlocking. Federally regulated accounts do not permit 50% unlocking until age 55 and British Columbia does not even allow for 50% unlocking. Alternatively, Saskatchewan has an option for those 55 or older to transfer locked-in proceeds to a Prescribed RRIF (PRIF), which permits the withdrawal of all the locked-in proceeds at any time. As a result, when trying to determine what unlocking options may be available for the funds in your LIRA or LIF, you must determine the correct jurisdiction and applicable rules that apply to your specific locked-in account.
Additional unlocking opportunity
The assets in your locked-in accounts are not as flexible as the assets in your RRSP or RRIF. If you have a LIF and are only withdrawing the minimum payments, you may wish to have the difference between the minimum payment and the maximum payment transferred on a tax-deferred basis to your RRSP or RRIF. This gradually unlocks assets that would otherwise remain locked-in, providing future flexibility for your retirement planning, while still maintaining the tax deferral.
The ATB Wealth Locked-in accounts reference guide is available if you wish to learn more about locked-in accounts.
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