Introduction
Withdrawing money from your Registered Retirement Savings Plan (RRSP) might seem intimidating, especially given the tax implications. However, the Lifelong Learning Plan (LLP) offers a way to tap into your RRSP funds without immediate tax consequences to help finance your or your spouse’s education. Here’s everything you need to know about this program.
How the Lifelong Learning Plan Works
The LLP is a federal program allowing Canadians to withdraw up to $10,000 per year, with a lifetime limit of $20,000 over four years, from their RRSP to fund full-time education costs. The key details include:
- Eligibility: The program can fund your education or your spouse’s, but not your children’s. The institution must qualify under the LLP guidelines.
- Repayment:
- Start repaying in the fifth year after your first withdrawal or the second year after you stop studying full-time—whichever comes first.
- Pay at least 10% of the amount borrowed annually and repay the full amount within 10 years to avoid taxes on withdrawals.
- Multiple Uses: You can use the LLP multiple times until age 71, provided previous LLP withdrawals are fully repaid.
Example of LLP Repayment Schedule
To illustrate how the repayment works, consider the following scenario:
- You borrow $20,000 over four years, starting in 2015, and graduate in 2019. Here’s what your repayment might look like:
| Repayment Year | Opening Balance | Minimum Amount to Avoid Tax | Amount Repaid | Closing Balance |
| 2020 | $20,000 | $2,000 | $2,000 | $18,000 |
| 2021 | $18,000 | $2,000 | $3,000 | $15,000 |
| 2022 | $15,000 | $1,875 | $2,000 | $13,000 |
| 2023 | $13,000 | $1,857 | $2,000 | $11,000 |
| 2024 | $11,000 | $1,833 | $4,000 | $7,000 |
| 2025 | $7,000 | $1,400 | $1,500 | $5,500 |
| 2026 | $5,500 | $1,375 | $1,500 | $4,000 |
| 2027 | $4,000 | $1,333 | $1,500 | $2,500 |
| 2028 | $2,500 | $1,250 | $1,250 | $1,250 |
| 2029 | $1,250 | $1,250 | $1,250 | $0 |
Benefits of the LLP
- Tax-Free Withdrawal: As long as you adhere to the repayment rules, the funds you withdraw from your RRSP are not taxed.
- Flexible Use: The program can be used for your education or your spouse’s, offering financial flexibility.
- Repayment Window: A 10-year repayment period allows for manageable repayment amounts.
Important Considerations
- Adherence to Repayment Terms: Failing to meet repayment terms will result in the withdrawn amounts being taxed as income.
- Eligible Institutions: Ensure the educational institution qualifies under LLP guidelines.
- Planning Required: Borrowing from your RRSP reduces your retirement savings, so consult with a financial advisor to assess the impact on your long-term financial goals.
Conclusion
The Lifelong Learning Plan is a practical tool for Canadians looking to upgrade their education or switch careers without incurring immediate tax penalties. While it offers significant benefits, careful planning and adherence to repayment terms are essential to maximizing its advantages. Speak to your financial advisor to determine if the LLP aligns with your financial and educational goals.
This article is written for educational purposes.
Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.
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