Whether you want to enhance your existing credentials or embrace a new career, the Registered Retirement Savings Plan Lifelong Learning Plan (RRSP LLP) can help you pay for the education or training you need.
The LLP lets you withdraw up to $10,000 per year to a maximum of $20,000 tax-free from your RRSP for you or your spouse to pay for a full-time program (or a part-time program, if the student is disabled). You can’t use the program to finance your children’s post-secondary education, though — that’s the function of the Registered Education Savings Plan (RESP).
Whether the program you select is considered full-time depends how the educational institution you are enrolled at characterizes your participation. However, because you can take courses by correspondence or through a distance education program, you could conceivably be deemed a full-time student even if you continue to work full- or part-time.
Paying back your RRSP
Y ou have up to 10 years to repay your RRSPs under the LLP. Typically, you must repay 10% of the total you withdrew each year until you have repaid the full amount. You do not have to pay any interest on the money you withdrew.
The Canada Revenue Agency (CRA) will send you an LLP Statement of Account each year, showing your LLP withdrawals, how much you have repaid so far, how much you still owe and how much you have to repay the next year.
The deadline to start repaying your RRSP under LLP depends on how long the CRA considers you a full-time student. For example, if you made an LLP withdrawal any time in 2010, and you qualified for the education amount (a tax deduction) every year since, you have until March 1, 2015 to make your first repayment installment — 60 days following the fifth year after your first LLP withdrawal. That’s the longest deadline.
If you’re like most people, however, you won’t be eligible for the education amount for the full five years, so your repayment period will start sooner. (For more information, see the CRA rules for when and how to make a repayment.) If you miss repaying the required installment in any year, you will have to pay taxes on that amount.
You can keep withdrawing money from your RRSP until the January of the fourth calendar year after your first LLP withdrawal, as long as you are still a full-time student (or part-time student, if you are disabled) and you have not exceeded the $20,000 maximum or the 10-year repayment period has not begun.
You can participate in the program as many times as you wish over your lifetime, provided you have fully paid back previous LLP withdrawals. You can also participate in the LLP at the same time as your spouse; if you do so, the family withdrawal maximum will total $40,000.
Can you combine an LLP withdrawal with the Home Buyers’ Plan?
LLP withdrawals are also permitted if you have previously pulled money out of your RRSP under the Home Buyers’ Plan and haven’t yet fully repaid it.
If you do not have an RRSP, you cannot set one up and then withdraw from it immediately. Your contribution must be in the RRSP for 90 days before you can deduct it from the income on your tax return.
You can continue to make contributions to your RRSP and deduct them from your income on your tax return after you have made an LLP withdrawal. However, you may not be able to deduct contributions you made before the withdrawal. For further details, see the CRA rules on Effect of LLP on RRSP deductions.
In a 2006 report (Canada’s retirement income programs), Statistics Canada found that in the first few years since LLPs were introduced in 1999, they were not particularly popular. Until the end of the 2004 tax year, only 49,000 individuals took part, withdrawing close to $363 million from their RRSPs. Compare this to the nearly 1.4 million holders of RRSPs aged 25 to 64 who cashed in all or part of their RRSP savings between 1992 and 2004 under the RRSP Home Buyers’ Plan.
Alternatives to LLP
One of the reasons the LLP program may not have attracted many takers is that if you’re unemployed with little or no income in the year you go back to school, you can simply make a regular withdrawal from your RRSP with negligible tax implications. And unlike an LLP withdrawal, a regular withdrawal does not have to be paid back.
Also, with the availability of tax-free savings accounts (TFSAs) since 2009, people may prefer to use TFSA money for education costs, because the funds can be withdrawn tax-free and the contribution room freed up and carried forward. Furthermore, there are no penalties or taxes if the money is not replaced in the account.
Whether it makes sense for you to use the RRSP LLP will depend on how much you have in your RRSP, whether you have TFSA savings and how much you are still earning when you go back to school.
Your financial advisor can run the numbers to help you develop a personalized, tax-effective approach for financing your planned course of study.