Awa Sow
A Registered Retirement Savings Plan (RRSP) is an investment account designed primarily for retirement saving. Either you or your spouse can contribute to an RRSP. This account is regulated by the Canadian government thus the word registered. Any interest or investment income that you earn in an RRSP is exempt from tax as long as the funds stay in the account. When you make an RRSP withdrawal, that’s when you have to pay taxes on the amount withdrawn. Because the contributions are tax deductible, you are required to pay taxes if you withdraw from the account as the amount withdrawn is considered additional income.
Ideally, you’ll want to only withdraw from your RRSP when you retire (it’s a retirement savings account after all). Most people will have a lower tax bracket when they retire. So by deferring the tax until you’re retired, you will end up paying less tax when you do withdraw from the RRSP account.
While it’s recommended to delay your RRSP withdrawal until retirement, it is possible to withdraw from your RRSP before then and not pay any tax on the amount withdrawn.
There are two options available that allow you to withdraw from your RRSP account without paying any tax. You can withdraw under the Lifelong Learning Plan (LLP) and the Home Buyers’ Plan (HBP). Let’s do a deep dive into each of these programs.
RRSP withdrawal under the Lifelong Learning Plan (LLP)
The Lifelong Learning Plan allows you to withdraw from your RRSP to finance full-time training or education for you or your spouse or common-law partner. You can withdraw up to $10,000 in a calendar year (or up to $20,000 in total) from your RRSP to finance your education. You are essentially borrowing from your retirement savings account (without any interest or taxes) to finance a full time education.
Who qualifies for the Lifelong Learning Plan (LLP)?
There are 3 conditions to follow in order to qualify for a withdrawal from your RRSP under the LLP:
1. You must be enrolled or have received an offer to enroll before March of the following year. The program needs to be for full time education, you must enroll in a qualifying educational program, and must enroll at a designated educational institution.
If you are not already enrolled in a program, you must have received a written offer from a qualifying educational institution to enroll before March of the year after you withdraw funds from your RRSP.
2. You need to be a resident of Canada
3. If you have made an LLP withdrawal in a previous year, your repayment period must not have begun.
Please note that you can’t set up an RRSP and automatically request a withdrawal under the LLP. The contributions in your RRSP have to be in your RRSP account at least 90 days before you can deduct them from your income tax.
How to participate in the Lifelong Learning Plan?
After you have checked to make sure you qualify to withdraw from your RRSP under the LLP, you need to complete form RC96 ( Lifelong Learning Plan (LLP) – Request to Withdraw Funds From an RRSP). This form will need to be filled out for every withdrawal you make and sent to the financial institution holding your RRSP. This will ensure that when the withdrawal is made no taxes are withheld.
How to pay back the LLP withdrawal?
When you withdraw from your RRSP under the LLP you essentially agree to repay this amount to yourself within 10 years. This amount will need to be redeposited in an RRSP account in your name and at any financial institution. Basically, you don’t have to repay the same RRSP account you withdrew the funds from and can set one up at any financial institution to repay the amount withdrawn under the Lifelong Learning Plan.
Generally, for each year of your repayment period, you have to repay 1/10 of the total amount you withdrew until the LLP balance reaches zero. This rule applies to all Lifelong Learning Plan withdrawals unless you die, reach 71 or become a non resident. You can always access your HBP balance by login in to your CRA account.
If a condition is not met while you are participating in the plan, your RRSP withdrawal will not be considered eligible. You will have to include the RRSP withdrawal as income on your Income Tax and Benefit Return for the year you received the funds and pay taxes on the amount.
Benefits of withdrawing from your RRSP under the LLP
The benefits of using the LifeLong Learning Plan to withdraw from your RRSP are the following:
- Be able to advance your education. This will allow you to borrow from your retirement savings to increase your earning potential. Therefore, you’ll be able to make more money to reimburse the RRSP withdrawal loan quicker as well as save even more than before for retirement.
- Participate in the plan as many times as you want over your lifetime. You can do this anytime starting the year after you bring your LLP balance to zero.
- Participate in the LLP at the same time as your spouse or common-law partner
- participate in the LLP even if you have withdrawn amounts from your RRSP under the Home Buyers’ Plan (HBP) that have not been fully repaid. But what’s the Home Buyer’s Plan?
RRSP withdrawal under the Home Buyers’ Plan (HBP)
The Home Buyer’s Plan is a program that allows Canadians to withdraw up to $35,000 from their RRSPs to buy or build a qualifying home for themselves or for a related person with a disability. You have up to 15 years to repay this amount to your RRSP account without any interest or tax.
Who qualifies to withdraw under the Home Buyer’s Plan?
The following conditions have to be met in order to qualify to withdraw from your RRSP:
- You must be a resident of Canada at the time of the RRSP withdrawal under the HBP as well as up to the time the qualifying home is bought or built
- You must be First time home buyer. A first time buyer refers to someone who in the four year period, did not occupy a home that he or she owned, or one that your current spouse or common-law partner owned.
- You must have a written agreement to buy or build a qualifying home, either for yourself or for a related person with a disability
- You must intend to occupy the qualifying home as your principal place of residence within one year after buying or building it. If you buy or build a qualifying home for a related person with a disability, you must intend that that person occupies the home as his or her principal place of residence.
- You can only withdraw funds that have been in your RRSP account for at least 90 days under the Home Buyer’s Plan.
How to participate in the Home Buyer’s Plan?
To withdraw from your RRSP under the Home Buyer’s plan, you will need to complete Form T1036, Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP. Just like with the LLP, this form will need to be sent to the financial institution holding your funds. This will make sure they don’t withhold any tax on the amount withdrawn under the HBP. You’ll need to complete this form for each withdrawal you make.
How to repay the Home Buyer’s Plan loan?
You have 15 years to repay the HBP loan into your RRSP account. Your repayment period starts the second year after the year when you first withdrew funds from your RRSP. For example, if you withdrew funds in 2021, your first year of repayment will be 2023.
Each year, the Canada Revenue Agency (CRA) will send you a Home Buyers’ Plan (HBP) statement of account, with your notice of assessment or notice of reassessment. This statement will include the amount you owe, the amount you paid so far, the amount remaining and any amount to include to your income because of non-repayment. You can always access your HBP balance by login in to your CRA account.
You can choose to start your repayments earlier. Any repayments made before you are required to start your repayments will reduce the amount you have to repay for the first year. Just like with the LLP, you can repay your RRSP at any financial institution (not necessarily the RRSP account you made the withdrawal from).
Bottom Line
The RRSP has many great advantages. Ideally, it’s recommended to keep the funds in your RRSP until you reach the age of retirement so you can reap all the benefits of it (compounding effect and saving on taxes). However, it’s also good to know that you can withdraw from your RRSP tax free to finance your education or to become a homeowner. It’s important to understand the many benefits of RRSPs so you can get all the great advantages and make great financial decisions.
