In a recent article, we explored home buyers' options when it comes to using their registered retirement savings plan to fund a home purchase. Using a first-time home buyers incentive known as the Home Buyers’ Plan (HBP), buyers can take out up to $35,000 of savings from their RRSP (or $70,000 when combined with a spouse or common-law partner) for a home down payment, without paying tax as you would for a standard withdrawal. Overall, it is a good option if you want to buy a house and have saved a good amount in your RRSP.
However, there is a catch to this plan: you cannot use this program if you have your money in a locked-in RRSP. This kind of retirement savings plan is much more limited in how it allows you to access your money, which presents a barrier for those hoping to access this money for their home purchase.
In this article, we will explore locked-in RRSPs and alternative methods you may be able to use to fund your home purchase when an RRSP withdrawal is off the table.
What is a locked-in RRSP?
A locked-in RRSP (and the similar locked-in retirement account, or LIRA) functions in much the same way as a regular RRSP, but with a few major differences. The general purpose remains the same: money contributed to the account will be tax-free and saved for retirement, with taxes to be paid later on when you access the account for retirement income.
The main difference with a locked-in account is the restrictions on how money can go in and out of the account. First of all, you can not make regular contributions to a locked-in RRSP. Instead, it may only be contributed to by a source like your employer's pension plan.
Money held in the account is inaccessible until you retire and begin collecting income; even then, there may be some withdrawal limits. In only a few circumstances, you can withdraw money from a locked-in RRSP, and even these have restrictions.
Why do people use locked-in retirement accounts?
Based on the restrictions, it may seem strange that anyone would choose to use locked-in RRSP or LIRA. In reality, a locked-in retirement plan is not something that most people opt for because of any sort of inherent benefit of the account. Instead, the decision to use a locked-in retirement account comes in an instance where it is necessary to do so in order to retain a certain amount of retirement funds.
The most common example is when an employee leaves a company with an employee pension plan. Often, the employee will have the option to take any accrued pension with them, and they will usually be required to place this into a locked-in account. In this way, your former employer can guarantee that this money is being used for their intended purpose once it is out of their hands. Each company pension plan will have its own terms, so be sure to read and understand the fine print when you start collecting.
The money contributed to a locked-in RRSP or LIRA will not be deducted from your yearly income taxes, though you won't pay taxes on it until you begin to withdraw. In addition, accrued pension funds will take up a portion of your RRSP limit as you grow them at your employer, so this portion of your total potential RRSP value will be locked in.
Knowing why people choose to use a locked-in RRSP, the choice seems clear. When faced with retaining pension funds that you have earned or forfeiting them, it makes clear sense to want to retain those, even if you won't be able to access them until later.
Can you use your locked-in account to buy a home?
There is no simple way to access your funds in a locked-in RRSP at will, so an option like the RRSP Home Buyers’ Plan or even a simple withdrawal is out of the question. The only real way to use these funds towards a home purchase would be to wait until you are retired and can unlock the account. However, this is not a viable option for most. Unfortunately, this means that if you want to buy a home now, you will need to look at other options.
When can you withdraw funds from a locked-in RRSP?
Though there are strict restrictions on withdrawing funds from a locked-in retirement account, there are some cases in which financial institutions will allow some money to be withdrawn. These circumstances are usually somewhat extenuating, and most people will not willingly subject themselves to these cases just for a withdrawal's sake. Some of the circumstances in which you can unlock funds from your locked-in RRSP or LIRA include:
If a person is experiencing financial hardships such as loss of income or medical expenses. The amount available to be unlocked will depend on circumstances but can be up to around $32,000 or 50% of the YMPE (Yearly Maximum Pensionable Earnings, or $64,900 as of 2022).
If a person has ceased to be a Canadian resident for more than two years, they are eligible to withdraw the amount in their retirement account and close the account.
If a person has been found to have a lowered life expectancy, as certified by a physician, they may be able to withdraw up to the full amount from their locked-in retirement accounts.
If a person is 55 or older and the total value in all locked-in accounts and pension plans is less than 50% of the YMPE, they can withdraw the amount in full.
Withdrawal conditions can be used along with one another, meaning you may be able to make multiple withdrawals if eligible. For example, if you take an amount of your locked-in account out due to low income, which puts you below the threshold for a low account balance withdrawal, you will be able to take out the remaining value in the same calendar year or a subsequent year.
As you can see, these options are not exactly something you can easily arrange to withdraw funds from your locked-in RRSP, and it will be much easier to find money elsewhere when it comes time to buy a home.
Other options than using your locked-in RRSP
If you were hoping to use RRSP funds to buy a home, only to find that your account is locked in and illegible for withdrawals, there may be some other options you can consider to help you with your purchase.
Use an unlocked RRSP
This option may seem obvious, but it bears mentioning. Just because you have a locked-in RRSP, doesn't mean you can't also have a second unlocked RRSP. Even if you can't unlock the full value of your retirement savings, you can be eligible to take out whatever money is not locked-in.
Get an RRSP loan
If you have the contribution room in a standard unlocked RRSP, you may be able to get an RRSP loan in order to take advantage of the home buyer's plan. Naturally, you will still need to pay back the loan. However, there may be some benefits. For example, the tax deductions from an RRSP loan will often help pay off some of the principal, not to mention it can also help you buy your home sooner.
Unfortunately, if you use an RRSP loan in accordance with the home buyer's plan, you will now have two monthly payments to take care of. In addition, you will need to ensure that your loan enters your RRSP at least 90 days before you plan to withdraw under the Home Buyers’ Plan.
Make use of other first-time home buyer benefits
When it comes to benefits for first-time home buyers, the Home Buyers' Plan is certainly one of the strongest, but it isn't the only option. There are many options, both federally and provincially, that provide some form of help to first-time home buyers, be it a rebate, tax benefit, or discount on closing costs.
One such option may be the First-Time Home Buyer Incentive. The government provides home buyers with a shared equity mortgage option in this program. Essentially this means the government will own a share of your home and benefit (or lose) from the change in equity. Under this program, eligible buyers can get 5% or 10% off their home purchase, which could be comparable to the value of the HBP.
Other options such as the Home Buyers Amount, GST / HST new housing rebates, and land transfer tax discounts can be used by eligible home buyers to reduce the cost of their first home purchase.
Use Home Equity
If you aren't looking to buy your first home and thus aren't eligible for the home buyers plan in the first place, you may still want to use your RRSP while incurring taxes, which still won't be an option with a locked-in RRSP.
In this case, you may have an existing property with a significant amount of equity that can help you to make a purchase. Borrowing from your home equity is a very popular way for Canadian homeowners to access funds for a variety of different uses, including a home purchase.
There are a few options for using your home equity, such as a second mortgage, a home equity line of credit or a home equity loan. Each will come with its own terms and repayment conditions but can be a great way to leverage your existing home equity.
Are you looking to buy or sell property? If you’d like, we can have a real estate expert show you the most efficient process that saves you thousands of dollars, a lot of time, with little or no inconvenience to you. Contact us today!
