Locked-in retirement plans can hold a mortgage…but should they?
If you roll over your pension into a self-directed locked-in retirement savings plan, you can invest the funds in pretty much the same qualified investments as in an RRSP. In some provinces, the list also includes an owner’s personal mortgage. The idea is that you borrow money on real estate you own (to use as you wish) and then essentially pay yourself back through the locked-in plan. Here’s how it works.
A Locked-In Retirement Savings Plan (LRSP), also referred to as a Locked-in Retirement Account (LIRA) in some provinces (with slight variations in still other provinces), is a special type of retirement fund designed to provide retirement income over your lifetime. Generally, locked-in company pension plans that you accumulate through your career are rolled over into locked-in plan when the pension vests (i.e., when you are entitled to receive the accrued funds in your plan). These vehicles are governed by provincial regulations, which can differ in material respects depending on the province where the plan originates, when it comes to such things as qualified investments and withdrawals. In Ontario, for example, locked-in money is administered according to the Ontario provincial Pension Benefits Act and Regulation.
Wide investment choice for locked-in plans
Generally, though, if you roll over your pension into a self-directed locked-in plan, you can invest the funds in pretty much the same qualified investments as in an RRSP. That may include, for example, stocks listed on approved exchanges, Treasury bills, bonds, mutual funds, exchange-traded funds, and so on. In some provinces, including Ontario, the list also includes an owner’s personal mortgage. You can open a self-directed locked-in retirement plan at most major Canadian financial institutions.
The Ontario rules say that a LIRA that holds your personal mortgage must be administered at arm’s-length from you, and must be insured (the Canada Mortgage and Housing Corporation and GE Capital are two widely accepted mortgage insurers). And the interest rate must be set at rates generally available in the open market. If you default on mortgage payments, the mortgage administrator may foreclose, just like any other mortgage, so you have to be certain you can make the payments. In a foreclosure, the property can be sold and the outstanding loan amount paid back into the locked-in account.
Mortgage investment not for everyone
So the big question is whether you will have the cash flow to make those mortgage payments every month. You’re paying yourself in one sense, but in another sense, it’s out of your hands. This strategy may be useful for certain high net worth individuals who want access to cash from locked-in accounts for business or investment purposes as part of a more complex financial plan. For most retirees or pre-retirees, though, it’s probably not the right option.
Because placing a personal mortgage into your locked in retirement plan can be legally and financially complex, you should consult a qualified financial planner or at the very least your own lawyer before taking this step.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.