From day one of our working life, we hear about the importance of setting aside money for retirement. And one of the best ways to do that is with a Registered Retirement Savings Plan (RRSP). RRSPs exist as a way to help Canadians save for the future. And as an added bonus, it shelters your income in a savings vehicle the government doesn’t touch until you’re ready to retire. However, what if you want penalty-free access to the money before then? The Lifelong Learning Plan is one way to safely unlock those funds.
To clarify, while the money in an RRSP is typically stowed away untouched until retirement, it’s not under lock and key. The money is accessible but at a cost. Unless! Yes, there is an ‘unless,’ when it comes to withdrawing funds from your RRSP early. The Government of Canada provides a few circumstances under which withdrawals from your RRSP are allowed without penalty.
The Lifelong Learning Plan (LLP) and the Home Buyer’s Plan (HBP) are two available opportunities. They help fund two of life’s bigger events – home buying and higher education.
What is the Home Buyers Plan?
Created to help first-time homebuyers get into the real estate market, the HBP allows one-time withdrawals of up to $25,000 to put towards the purchase of your first home. Withdrawals are tax-free. However, you repay it in full within 15 years. In addition, the funds are invested in your RRSP for a period of time before it’s available for tax-free withdrawals.
You make a minimum contribution to repay the funds every year, with the exception of the first tax year after making the RRSP withdrawal.
The federal government is currently considering increasing the withdrawal amount for the HBP by $10,000, to $35,000.
What is The Lifelong Learning Plan?
The LLP was introduced to allow people to complete or enhance their education. It allows you to withdraw up to $20,000 from your RRSP, tax-free, over a four-year span (but at a max of $10,000 per year). The funds pay for training or education for you, or for a spouse or common-law partner. However, they cannot be used to finance your child’s education.
While the HBP allows 15 years for repayment, the rules require that the LLP is paid back in full within 10 years of the withdrawal.
How Do I Repay My Lifelong Learning Plan?
When repaying the Lifelong Learning Plan withdrawal, the money is contributed back into your RRSP starting in your repayment year, or within the first sixty days of the following tax year. Come tax time, you designate the contributions to your RRSP as a repayment of the LLP. But, if you fail to designate the funds as for the LLP, the lender considers it a missed repayment.
To determine your repayment year, check this chart. As for the government, it looks at whether you were a qualified student for three months in each of the previous two years. And as long as you remain in school, you don’t begin repayments until the fifth year after your first withdrawal from the Lifelong Learning Plan.
What Happens If I Don’t Repay The Minimum?
You are responsible for managing your repayments and ensuring you meet the requirements. However, all is not lost if one year you pay less. There is no penalty. But the balance owing adds to your income the following year. And, it is taxed accordingly.
Are Repayments Tax Deductible?
You cannot double dip RRSP tax benefits. To clarify, you receive a tax deduction on the funds in the initial investment. Therefore, repayments to your LLP are not tax-deductible.
Lifelong Learning Plan Eligibility
To qualify for the LLP, you first need an RRSP to draw money from. Then, there is specific criteria the government requires you to meet in order to qualify, including
- Enrolment in school full-time
- In a Lifelong Learning Plan Qualifying Educational Program
- Being a Canadian citizen and a resident of Canada
- Not in an existing repayment period
Can I Take Advantage Of The LLP More Than Once?
Unlike the HBP, which is only for first-time homebuyers (hence, only happens once), the LLP is available for as many times as you need it. However, there is one limitation. You must repay the initial loan before you can take out another LLP.
Lifelong Learning Plan Withdrawal Limit
You can withdraw a maximum of $10,000 a year, to a maximum of $20,000, tax-free from your RRSP. If you plan to take a program that is longer than two years, it’s important to realize that you can’t withdraw more funds after you reach the maximum. So it’s best not to withdraw the full $20,000 in the first two years of school. Otherwise, you won’t have any money left to complete your education. Planning is key.
Can You Withdraw From An LLP And The HBP At The Same Time?
Because of the nature of the withdrawals and the rules of repayment, there are no restrictions on taking advantage of both. You repay each one, based on their individual terms and the withdrawal amount.
Lifelong Learning Plan Form
Ready to sign up? Great. To begin accessing the funds from your RRSP to attend school, fill out this Government of Canada Lifelong Learning Plan form.
Lifelong Learning Plan Examples
The following Lifelong Learning Plan examples, provided by the Government of Canada, spell out unique circumstances for accessing and repaying the LLP.
Carlos makes LLP withdrawals of $10,000 in 2014 and $5,000 in 2015 as his spouse is attending university. His spouse files Income Tax and Benefit Returns every year indicating her enrollment in a full-time program. Carlos wants to withdraw another $5,000 in 2019. However, even though his spouse is still in school, repayment for his previous $15,000 withdrawals begin in 2019. And any 2019 withdrawals are considered ineligible and taxable.
Nadia makes her first LLP withdrawal in 2017 for herself, as the LLP student. And she completes the program the same year. She is not a student in 2018 or 2019. However, in 2019 she applies for a full-time program that begins in January 2020. She wants to withdraw from the LLP again. But, since Nadia has to start repaying her 2017 withdrawal in 2019, (see the chart, When to start repaying your LLP withdrawals) she cannot make another LLP withdrawal in 2019. And, she can’t make any withdrawals in subsequent years, until the year after she fully repays her first withdrawal.
Angela makes an LLP withdrawal of $5,000 in 2009 for her spouse, who is a full-time student that year. Her repayment period starts in 2011 and she is repaying $500 each year. In 2020, she decides to return to school and wants to withdraw $10,000. But, this withdrawal is ineligible — unless she makes contributions to her RRSP or PRPP (Pooled Registered Pension Plan), or both, and chooses to fully repay the remaining $1,000 by making the designation in Part B on Schedule 7 of her 2019 Income Tax and Benefit Return. If she does that, she can start a new participation period beginning in 2020 and designate herself as the student.
Is The Lifelong Learning Plan Worth It?
Before taking money out of your retirement nest egg, consider the impact on your savings. In addition, think about your ability to retire comfortably, and the value of the educational path you plan to pursue. Is the new career path lucrative? Or will you struggle to find work in that field? And is it going to increase your current standard of living? Or is paying the loan back going to be a struggle?
Ultimately, crunching the numbers is the only way to know for sure if withdrawing from your RRSPs to follow an educational path is a wise choice.
Sit down with a financial professional to find out if the LLP is right for you. They can help layout the short- and long-term implications, and give you an idea of what your future looks like.