Two less-traditional ways to use RRSPs

By: Sound Choices • October 2, 2019 • Personal Finance

Withdrawing money from your Registered Retirement Savings Plan (RRSP) before you’re ready to retire can be a scary thought – and for good reason. When you take money from your RRSP to cover unexpected expenses or pay down debt, you have to pay tax on those withdrawals (anywhere from 12% to 49% depending on where you live and how much you earn).

There are two exceptions, though. Thanks to two federal government programs, the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP), you can borrow from your RRSP without penalty to help fund the purchase of your first home or to help cover the costs of going back to school. These programs can help people with multiple priorities save through one combined savings vehicle.

Buying (or building) your first home

For some Canadians, coming up with the down payment needed to buy their first home can be a challenge. But with the HBP, you can withdraw up to $35,000 from your RRSP (or $70,000 per couple) to help buy or build your first home.

You have 15 years to pay back the amount you withdrew, and must start paying it back in the second year after you buy your home. The minimum payment each year is calculated by the CRA as the balance owing divided by the years remaining in the 15-year repayment schedule. You can pay more than the minimum amount, which can be helpful because you could pay back larger amounts if your income increases.

You’ll also need to enter into a written agreement to take part in this program, which is something your financial advisor can help you with. Keep in mind that each Canadian can use this program only once.

Going back to school

With the LLP, you can borrow up to $10,000 a year from your RRSP – to a maximum of $20,000 over four years – to help cover full-time education costs. The school you’re attending also has to qualify under the program. You can use this program to fund your education or your spouse’s, but not your children’s.

You’ll need to start paying back the money you borrowed from your RRSP by the fifth year after making your first withdrawal or in the second year after you stop going to school full-time, whichever comes first.

You must pay back at least 10% of what you borrowed in the first year that you make repayments, and you have up to 10 years to pay back the entire amount. You’ll be taxed on the money you withdrew unless you meet both of these conditions.

Unlike the HBP you can use the LLP multiple times until you turn 71, as long as you’ve paid back any amounts you’ve already withdrawn under the program.

Let’s say that in September 2015, you borrowed $10,000 to go back to school full-time. You borrowed an additional $10,000 over the next three years (for a total of $20,000) and graduate in June 2019. Here’s what your payback schedule could look like.

LLP sample repayment schedule

Repayment year

Opening balance

Minimum amount to avoid extra income 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

Note: This example is hypothetical, for illustrative purposes only.

 

To learn more about either of these programs and whether they could work for you, contact your financial advisor and visit AGF.com/RRSP.

The contents are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.

™ The AGF logo and ®'Sound Choices' are registered trademarks of AGF Management Limited and used under licence.

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