According to a recent Gallop poll, milennials are job hopping more than ever. Makes sense, 60% of job hopper reported higher earners in their new gig.
When leaving a job with a pension, you typically have three options on what to do with your RRSP and LIRA.
Cash it out:
Sounds simple enough (spoiler alert: it’s not). We can’t provide specific advice due to compliance reasons, but cashing out your RRSP is generally not recommended for most people. Doing so will likely result in high taxes and (possibly) withdrawal penalties. You can’t access the LIRA until retirement age, with a few exceptions.
Leave it alone:
If you choose to leave your RRSP/LIRA with your previous employer, you won’t be eligible for any future matching contributions. Over time, if you change jobs frequently, you may end up with multiple RRSP/LIRA
accounts, making it difficult to manage.
Move it:
You can transfer the balance of your RRSP/LIRA to a personal retirement account or might have the option to roll it into your new employer’s
pension plan.
In this article, we will delve into the final option.
RRSP vs LIRA
RRSP: Otherwise known as Registered Retirement Savings Plan (You already knew that, but we’re playing the SEO game). You can make cash contributions to this account. You can also consolidate your RRSP balances from old employer plans into this account. Or you can do both.
LIRA:
A LIRA stands for Locked-In Retirement Account. The “locked-in” aspect means that there are certain restrictions on withdrawing funds from this account.
The Gist
The additional feature of these plans is that it allows you to transfer the balance back to an employer-sponsored plan. However, it’s important to note that employer plans like RRSPs/LIRAs often have fewer investment choices and higher fees compared to individual retirement accounts (not many offer index funds). Therefore, it is almost never beneficial to transfer your balance back to an employer plan.
Don’t be swayed by the perceived “flexibility,” “options,” or “tax benefits” that make it seem like an excellent choice because they are essentially identical to a personal RRSP/LIRA account.
Final Thoughts
We’re not disregarding the importance of contributing to employer sponsored RRSPs/LIRAs (the matching contributions are free money) However, once you leave a job, this benefit is gone.
So, the next time you leave a company and must decide what
to do, move it to a personal plan.