The Canadian government encourages you to finance your education through the Canadian Registered Retirement Savings Plan (RRSP) by participating in the Lifelong Learning Plan. Read on to discover how you can benefit.
Key Points In Brief
The Lifelong Learning Plan allows contributors to the RRSP to make a temporary withdrawal of up to $20,000. You can use this money to finance your education or that of your spouse or common-law partner (CLP). The temporary withdrawal is non-taxable, but do take care to read about repayment of the loan below.
One of the limitations is that you may only withdraw $10,000 annually. There is a maximum repayment period of 10 years.
Understanding the Lifelong Learning Plan (LLP)
You can start contributing to an RRSP from the moment you start working. It is one of the best ways to set aside money for retirement.
Think of it as saving for the future. The idea is that you do not withdraw those funds before retirement, but the good news is that you can have access to it before then.
Home Buyers and the LifeLong Learning Plan
In fact, the RRSP actually provided two benefits rolled into one. You can unlock that cash without being penalized in any way
- to buy a home under the Home Buyers Plan (HBP) if you qualify as a first-time buyer under Canadian law
- to fund your training or education through the Lifelong Learning Plan
Examples of Lifelong Learning and Disadvantages of LLP
You should note that you can't finance the education of your child or children through the LLP. Lifelong learning covers courses lasting three consecutive months or longer. Courses ranging from vocational training to further academic education from any designated institution in Canada or the United States of America.
One disadvantage of accessing the LLP is the opportunity cost. Since compound interest applies to RRSPs, borrowing from your RRSP could result in a lower level of savings at retirement.
Eligibility for the Lifelong Learning Plan
The basic eligibility requirement for participation in the LLP is that you already have an RRSP from which you can withdraw money. In addition, you have to be enrolled in school full-time and have written confirmation of your enrolment to qualify. Aside from that your program of study has to be an LLP qualifying educational program.
This means that the program must
- last for three consecutive months
- require students to attend at least 10 hours of instruction or work per week
- be offered by a designated educational institution.
The Lifelong Learning Plan is only available to Canadian citizens. And finally, to make LLP withdrawals, you cannot already be in an existing repayment period.
The great thing about the LLP is that subject to the conditions above, you can access it as many times as you wish until you turn 71 years old. We would advise, though, that you plan carefully, given the maximum withdrawal limit of $20,000. It is a good idea to spread the available funds evenly over the period of your educational program.
Even if you already participate in the first-time Home Buyers' Plan (HBP), you can still participate in an LLP. The types of withdrawals and repayment requirements mean that there is no reason why you cannot take advantage of both. It is worth ensuring, however, that you will be able to honour your repayment obligations.
Repaying the Lifelong Learning Plan
You must pay back the amount you borrowed in full within 10 years of having made that withdrawal.
When you make repayments each year, the money is re-contributed into your RRSP. Repayments can either start in your repayment year or within the first 60 days of the following tax year.
When you submit your annual tax return, you must designate the contributions you have made to your RRSP specifically as a repayment of the Lifelong Learning Plan. If you fail to do so, it will be considered a missed repayment. This is a very important point to note, and you need to understand your RRSP and the LLP as being two sides of the same coin.
If you do not repay the entire LLP withdrawal within the maximum repayment period of 10 years, you cannot recontribute and the borrowed amount is lost. In other words, you will have less money to look forward to when you retire, which is not a healthy situation to be in.
One more aspect to note is that you have to repay all LLP withdrawals to your Registered Retirement Savings Plan even if you go bankrupt. The Canada Revenue Agency has specific rules to follow if you do not, and it is worth finding out exactly what to do if you find yourself in this situation.
How Do I Figure Out My Repayment Year?
This chart provided on the Canada Revenue Agency website, will help you to determine when you have to start repaying your LLP withdrawals. The following rules apply:
If this is the year you made your first withdrawal, you do not have to start repaying it this year.
If it is the fifth year after you made your first withdrawal, then yes you would have to start repaying it. For example, if you made your first withdrawal in 2016, you would have to start repaying it in 2021.
You do not have to start repaying the LLP withdrawal if you are considered a "qualifying student" for three months of this year.
If you were not considered a qualifying student for at least three months of last year, then you will have to start repaying your LLP withdrawals this year.
As long as you remain in the training or educational course, you will not have to start repayments until the fifth year after your first withdrawal.
Forms, Forms, Forms!
To apply to withdraw funds under the Lifelong Learning Plan, you need to complete Form RC96 [Form RC96, Lifelong Learning Plan (LLP) Request to Withdraw Funds from an RRSP]
When making payments for the year, you need to complete Schedule 7 (RRSP and PRPP Unused Contributions, Transfers, and HBP or LLP Activities). This schedule must be filed with your Income Tax and Benefit Return for the repayment year in question.
What Happens If I Don’t Repay The Minimum?
If by mistake you pay less than the minimum repayment in any one tax, you do not incur any penalty. But the balance of what you still owe is added to your income the following year for taxation purposes. In other words, you will be taxed on it.
Are Tax Deductions Applicable to LLP Repayments?
There are no tax deductions for LLP repayments. When you first invest and start contributing to the RRSP, you receive a tax deduction. So, you have already received the benefit of a tax deduction.
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It's hard when you're just starting out to think of retirement savings, insurance, and further education. It can be scary, even. We understand that.
Participating in the Lifelong Learning Plan is one way to improve your educational qualifications and get ahead. . It underscores the idea that investing in RRSPs is a sound investment for your future. It is also wise to work towards financial security for you and your family early on by committing to other types of insurance products.
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