Withdrawals from the RRSP are included in your income for tax purposes, so you’re taxed at your marginal rate. If you pull $10,000 from an RRSP, and are already earning a $50,000 income, then you’d owe $2,965 in taxes on that withdrawal. There are two exceptions to this: The first is if you are using the RRSP to fund the down payment on your first home. The second is if you are pulling money out of your RRSP to pay for education expenses. My last video was on the Home Buyers Plan, today I’ll focus on the Lifelong Learning Plan.
The Lifelong Learning Plan allows you to use funds currently within your RRSP for education costs. You can withdraw money from your RRSP to pay for you or your spouse or common-law partner to pursue a qualifying education program on a full-time basis at a designated educational institution, as long as you’re a resident of Canada.
I’ve included a link below that outlines the plan, including qualifying education and designated educational institutions. But in essence, any institution that allows you to currently claim the education amount on your taxes will count as a designated educational institution. Qualifying education is a post-secondary school level program offered by one of these designated institutions that lasts at least 3 consecutive months and requires you to spend 10 hours or more per week on courses, not including study time.
You can withdraw $10,000 per school year, up to a maximum total of $20,000 under the plan. You can keep withdrawing amounts from your RRSP’s until 4 years after the first withdrawal, as long as you still meet the conditions and the repayment period has not begun. For example, if you made withdrawals in 2013 and 2014, the last withdrawal you could make would be in 2017.
You can participate multiple times, but you have to pay back the full Lifelong Learning Plan balance first before you can participate again. If you withdraw more than the $10,000 yearly limit, or more than the $20,000 maximum, the excess will be included in your income and you’ll owe taxes on this amount. Like the Home Buyers Plan, contributions need to be held within the RRSP for 90 days before you can withdraw them. With this plan, you have 10 years to repay the balance, again split evenly each year, so the maximum amount would be $2,000 per year. There are various times when the repayment period starts, depending on your situation, which are outlined in the link in the description below. If you contribute less than the amount you have to repay, the difference is included in your tax return for the year.
Like the Home Buyers Plan, the Lifelong Learning Plan is essentially an interest-free loan to yourself, with a specified repayment schedule. If you are pulling money that is earmarked for retirement, this could leave you with less money in retirement since you forgo the compound returns that could be earned in the account. Whether or you should use your RRSP for the Lifelong Learning Plan or if you should use other means for funding your education will depend on your situation, and you should talk to an advisor to see what’s right for you.
In my next post, I’ll outline the consequences of pulling from your RRSP if you’re not using the Home Buyers Plan or the Lifelong Learning Plan, so subscribe to make sure you don’t miss it.
Lifelong Learning Plan Overview: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/llp-reep/menu-eng.html
Lifelong Learning Plan Details: http://www.cra-arc.gc.ca/E/pub/tg/rc4112/rc4112-16e.html#Start_repay_LLP
Qualifying Education & Designated Institutions: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/llp-reep/cndtns/nrlmnt-eng.html
